In early November and late December, we highlighted a big improvement in market breadth coming out of the October 30 market low. Somewhat surprisingly, this strength has had staying power into early 2021. We surmise that massive liquidity as well as the continuous strong breadth has made overheated market sentiment absolutely useless as a contrarian indicator.

We don't often talk about market seasonality in this report. Stock-market seasonality used to be pretty consistent and was based on the four-year cycle. Why? Mostly, it had to do with the fact that the U.S. was once primarily a manufacturing economy. And within manufacturing, those doing the ordering are very susceptible to major emotional mistakes at exactly the wrong time.

Stock prices, as expressed by the S&P 500, remain above fair value, which our model pegs at closer to 3200 due to the expected earnings decline in 2020. Our stock-market valuation model takes into account factors such as stock prices, five-year normalized earnings (three historical years, two forward-looking), GDP, inflation, and T-bond and T-bill yields. We note that stocks rarely trade right at fair value. Since 1960, on average, the index has traded at a tight 2% above fair value, but the standard deviation to the mean is 16%. As such, we normally expect the S&P 500 to trade between 14% undervalued and 18% overvalued. At current prices, the stock market is almost 20% above fair value, implying that investors are quite optimistic about equities in the coming months. We'd feel better about the outlook for stocks if valuations were not so stretched. Several factors could improve valuations: a pullback in stock prices; lower bond yields; or better earnings, as the current 4Q EPS reporting season is expected to be the final negative comparison year over year related to the pandemic.

Stocks fluctuated on Thursday morning, a day after Wednesday's strong rally, as President Biden prepared to announce a new federal pandemic response strategy that will include an accelerated vaccine rollout. On Wednesday, Mr. Biden signed 17 executive orders reversing Trump administration policies in such areas as climate change, immigration, racial equality, and government accountability. On the employment front, the Labor Department reported that first-time claims for state unemployment benefits fell to 900,000 for the week ended January 16, down from a revised 926,000 a week earlier and below the Bloomberg consensus forecast of 935,000. The Dow fell 0.1%, the S&P rose 0.1%, and the Nasdaq rose 0.5%. Crude oil fell to $53 per barrel, while gold traded near $1863 per ounce.

Stocks rose strongly on Wednesday morning ahead of the inauguration of Joseph R. Biden as the nation's 46th president. President Biden enters the White House facing the twin crises of the pandemic and a battered economy, and is expected to move quickly on new stimulus measures and other initiatives. He will also sign a wide range of executive orders reversing Trump administration policies on his first day in office. The Dow rose 0.6%, the S&P 1.1%, and the Nasdaq 1.7%. Crude oil traded near $53.50 per barrel, while gold rose $16 to $1856 per ounce.

Argus has published its latest Portfolio Selector, which features its popular Focus List. Each month, Director of Research Jim Kelleher, CFA, surveys the team of Argus Research industry analysts for their timeliest recommendations out of the company's fundamental universe of approximately 500 stocks. The Focus List typically includes 30 stocks: turnover is high, as Director of Research Kelleher typically adds three or four new stocks per month. Below are the latest additions, all of which are rated BUY at Argus.

As we mentioned in early November and late December, there was a big improvement in market breadth coming out of the October 30 market low. Somewhat surprising is that this strength has had staying power. We surmise that massive liquidity and continuous strong breadth has made very overheated market sentiment absolutely useless. This is tough to swallow, as it is a big input in our work. But it has happened in the past (though not very often).

Stocks edged higher on Wednesday morning, reversing early losses amid optimism about new fiscal stimulus spending and improving economic conditions in 2021. Inflation data was muted. The Labor Department reported that its consumer price index rose 0.4% in December, driven mainly by higher gasoline prices, up from 0.2% growth in November and in line with consensus expectations. The CPI also increased 1.4% from the prior year, up from 1.2% in November. The Dow rose 0.1%, the S&P 0.1%, and the Nasdaq 0.3%. Crude oil traded near $53 per barrel, while gold rose $14 to $1858 per ounce.

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are Anthem Inc (ANTM); Activision Blizzard Inc (ATVI); Coca-Cola Co (KO); International Business Machine (IBM) and the Focus List deletions are Procter & Gamble Co. (PG); Electronic Arts, Inc. (EA); CIENA Corp. (CIEN); Vertex Pharmaceuticals, Inc. (VRTX).

The U.S. economy lost 140,000 jobs in December -- reversing a positive pattern of employment recovery that had been in place since May. Job losses in the leisure and hospitality sectors reflected the recent increase in coronavirus cases in the U.S. and the efforts of states to contain the pandemic. The unemployment rate was steady at 6.7%. Notable job losses occurred over the month in leisure, education and government. The number of jobs increased in the temporary help and courier segments. In December, 23.7% of employed persons teleworked because of the coronavirus pandemic, up from 21.8% in November. The number of unemployed persons, at 10.7 million, was up 5 million from the February level. On Thursday, the Labor Department reported that another 787,000 people filed initial unemployment claims, and the total of continuous claims was 5.2 million, down from 6.2 million a month ago. These data points indicate that the employment environment, while improving, is still under stress. We expect the unemployment rate will remain high (and the Federal Reserve will keep interest rates low) into 2021 as the U.S. economy slowly recovers.

Stocks rose strongly on Thursday morning as investors looked past yesterday's attack on the Capitol by supporters of President Trump, and took a positive view of the results of the Georgia runoff elections, which handed Democrats control of the Senate. On the employment front, the Labor Department reported that first-time claims for state unemployment benefits fell to 787,000 for the week ended January 2, down slightly from 790,000 a week earlier and below the Bloomberg consensus forecast of 800,000. The Dow rose 1.1%, the S&P 1.6%, and the Nasdaq 2.2%. Crude oil rose slightly to $51 per barrel, while gold traded near $1916 per ounce.

ARGUS ANALYSTS' TOP PICKS FOR 2021

Our bond/stock asset-allocation model is rendering the two assets in line at fair value. That means that neither one is a clear over-weight in diversified portfolios. Our model takes into account current levels and forecasts of bond yields, inflation, stock prices, GDP and corporate earnings. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.18 sigma, with a standard deviation of 1.0. The current valuation level is 0.01 sigma premium for stocks, essentially in line with fair value. The model has done a good job of highlighting value. For example, stocks were very attractive compared to bonds in the late 1970s, when benchmark Treasury rates were in the high teens before heading consistently lower over recent decades. The model indicated that stocks were at a sharp premium to fair value prior to the "dot-com" crash of 2001 and prior to the Great Recession in 2007-2009. Starting in 2009, the model favored stocks -- another good call. As the chart shows, the market can manage with premiums and discounts for an extended time. Equity valuations will likely start to improve further once corporate earnings begin to rebound next year.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.