US Stock Market Mixed Close on December 23, 2020: Dow Rises, S&P 500 Dips

As the final full trading day before Christmas 2020 concluded, US equity markets showed a mixed performance. The Dow Jones Industrial Average experienced a modest holiday rally, while the S&P 500 relinquished its earlier gains in the closing minutes. Meanwhile, the Nasdaq saw a slight decline, reversing the week's positive momentum.

Financial stocks and small-cap companies led the week's gains, driven by investor optimism about rising real interest rates and a broader economic recovery.

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Labor Market and Consumer Spending Update

Contrary to hopeful signs, the labor market recovery remains fragile. For the week ending December 19, 803,000 Americans filed first-time unemployment claims, marking the third consecutive week above 800,000, albeit slightly below expectations.

Personal consumption expenditures (PCE) fell in November for the first time in seven months, decreasing by $63.3 billion or 0.4%. This contraction reflects reduced spending on clothing, footwear, and new vehicles, partially offset by increased purchases of groceries and beverages. Additionally, expenditures on dining, accommodations, and household utilities declined.

The drop in consumer spending aligns with a $221.8 billion (1.1%) decrease in personal income, influenced mainly by reductions in Paycheck Protection Program loans, though wage growth in service sectors provided some relief. The forthcoming $900 billion stimulus package may bolster incomes and spending in the new year.

SEC Approves New Direct Listing Rules

The Securities and Exchange Commission (SEC) has authorized a new form of direct listing, enabling companies to raise capital without traditional IPO underwriting fees. This change benefits startups by reducing costs and allowing insiders greater control over share pricing and equity dilution.

The New York Stock Exchange (NYSE) championed this initiative to streamline the direct listing process, aiming to attract more public listings amid a two-decade decline in publicly traded companies.

Beneficiaries of the New Rule

• Companies seeking cost-effective public listings without extensive roadshows.
• Stock exchanges like NYSE and Nasdaq looking to increase listings.
• Company insiders wanting to retain equity and pricing control.

Parties Potentially Disadvantaged

• Investment banks losing underwriting fee revenues.
• The Council of Institutional Investors opposing the rule due to reduced underwriting profits.

Several prominent companies have successfully utilized direct listings, and this trend is expected to grow in 2021.

Market Conditions: Overbought Stocks and Broad Rally

Historical patterns suggest asset prices revert to their mean over time. After peaking on November 16 with 73% of S&P 500 stocks classified as overbought, this figure has dropped to 32.4%, indicating a moderation in price extremes.

The market's upward momentum is supported by broad participation across various sectors and individual stocks beyond the previously dominant FAANG and FAAMG groups, signaling a healthier and more balanced rally.

Stocks Leading the Pre-Holiday Rally

On December 23, 277 US-listed stocks reached new all-time highs, including strong performances from small-cap stocks as the Russell 2000 index also hit record levels.

Notable large-cap performers include:

• Chipotle (CMG): Overcoming last summer's operational challenges, Chipotle has been a top food and beverage stock performer throughout 2020.
• Ingersoll Rand (IR): Benefiting from industrial and manufacturing sector recovery, Ingersoll Rand's stock has steadily climbed since spring.
• Sonos (SONO): The home audio leader saw its shares surge nearly 60% year-to-date, capitalizing on increased home media consumption.

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