The Dow Rose Only 104 Points Because Stocks Have Run Hot Lately

Stocks rose slightly Tuesday and cooled down from recent gains. The continued wait for a stimulus package from Congress weighed against the start of Covid-19 vaccinations in the U.K.

The Dow Jones Industrial Average rose 104.09 points, or 0.35% to close the day at 30,173.88. The S&P 500 rose 0.28%. The Nasdaq Composite rose 0.5%.

Two sticking points between Democrats and Republicans are holding back the finalization of a $908 billion bipartisan coronavirus relief bill. Republicans want to see more liability protections for small businesses, while Democrats want to see increased funding for states and municipalities. A deal has been drawing closer, but there is still work to do. Still, investors are fairly confident the stimulus package will get done this year as economic data have recently shown a weakening recovery. The cash provided to small businesses and households would provide a bridge for the economy to go from lockdowns currently to vaccines and reopenings soon.

But one major positive Tuesday: Pfizer (PFE) began distributing its vaccine in the United Kingdom. Investors had expected this, but with the Food and Drug Administration saying Pfizer has a “favorable safety profile,” investors can be confident that more vaccines will soon be distributed. Vaccine makers Johnson & Johnson (JNJ) and Moderna (MRNA) rose 1.7% and 6.5%, respectively. Pfizer rose 3%.

Still, the move in stocks was relatively muted, continuing a mini-trend seen the last few days. Monday, the S&P 500 fell 0.19%, and the index is essentially flat since Friday’s close.

Some on Wall Street say the market is “consolidating,” or failing to move much in one direction or the other while investors gauge progress on earnings and economic growth. “There has not been a ton of economic news and the market is waiting to absorb some of the recent gains and they’ve been explosive,” Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company told Barron’s. Since Sept. 23, the start of a fresh rally in stocks, the S&P 500 is up more than 14% as companies beat third-quarter earnings handily, and vaccine and stimulus developments have progressed.

Now, “the S&P 500 [is] also extremely expensive” on estimated 2021 per-share earnings, wrote Lori Calvasina, chief U.S. equity strategy at RBC Capital Markets in a note. She noted that the average stock on the index is trading at roughly 21.7 times 2021 earnings-per-share estimates. That is above the long-term average of about 15 times, partly because ultralow interest rates encourage investors to hold more in stocks over safe bonds. Still, some worry the valuation level is getting slightly excessive.

Nonetheless, investors were signaling some optimism on Tuesday. Value stocks and small-cap stocks—both of which are more sensitive to changes in the economy than growth and large-caps are—outperformed. The Vanguard S&P 500 Value Index Fund ETF (VOOV) rose 0.8%. The Russell 2000, an index of small-caps, rose 1.2%. The Russell 2000 has been on a tear since Sept. 23, up 30%. Small-cap earnings estimates have fallen more than twice as much as those of large-caps, and strategists at Wells Fargo say they will probably snap back just as fast.

Plus, Schutte tells Barron’s that small-caps stock are likely seeing a bump-up in valuation, and that they aren’t just experiencing earnings momentum. Small-caps are currently trading at three times book value, against four times for the S&P 500. Wells Fargo sees that gap converging as small-cap stocks have traded at a premium valuation to large-caps at times during the expansion that ended before the pandemic began. “Small-cap stocks are an area we’ve been tilting our portfolios towards,” Schutte said.

For the next few months, watching the vaccine developments will remain key.

Write to Jacob Sonenshine at