• Banks Stocks Rally: After falling 14% last year the KBW Bank Index has risen 8.4% in the new year (versus 1.8% for the S&P500). The rally can be attributed to four factors: 1) the announcement last month that the government would allow banks to resume stock buybacks 2) Janet Yellen being selected as Treasury Secretary, a move generally well-received by Wall Street 3) optimism around economic growth as the Covid-vaccine gets distributed and 4) potentially higher interest rates resulting from further stimulus spending and the expectation of inflation moving upwards. JPMorgan, Citigroup, and Wells Fargo all release quarterly earnings on Friday.
• Earnings Gain Importance: Last year investors were most concerned with the uncertainty revolving around the coronavirus and politics. As a result, corporate earnings had less of an impact on overall price movements. In fact, options data showed that bets on large earnings-related stock moves were profitable only 24% of the time compared to a historical rate of 40%. Now that the political elections have been called and a covid vaccine is being distributed, investors may begin analyzing earnings more closely. Overall S&P500 earnings are expected to rise 23% this year.
• Traders Bullish on Commodities:  There are now 2.3 million more commodities futures/options contracts that bet on rising prices than those that bet prices will fall. This is the largest differential in bullish contracts in almost a decade (2011). The weakening dollar, the expectation of a global economic recovery, China’s large increase in commodity purchases, and investor’s desire to diversify beyond the high-flying stock market, have all helped drive the increase in the bullish outlook.
• Small Cap Effect Persists: Many investors have thought that the “small cap effect”, which says that stocks with the smallest market cap will beat those with the largest market cap over an extended time period, is no longer relevant. Data reflects that small caps have mostly underperformed (ex: Russell Microcap Index lagged the Russell Top 50 Mega Cap Index by 2.5% annually). However, a recent study shows that the small cap effect is still found in the S&P500 where the smallest 10% of stocks have outperformed the largest 10% by 1.2% annually. This may be due to the increased role of cap-weighted funds linked to the S&P500 index. Cap-weighted funds allocate more money to the largest companies, leading them to sometimes become overvalued and thus underperform some of their smaller peers.