Stocks fluctuated on Friday morning amid continued inflation concerns, a day after Thursday's sharp selloff. The Commerce Department reported that consumer spending rose 2.4% in January after declining in December, helped by government pandemic relief checks and a reduction in new coronavirus cases. The Dow fell 1.0%, the S&P fell 0.1%, and the Nasdaq rose 0.6%. Crude oil traded near $62 per barrel, while gold fell $44 to $1731 per ounce.

Stocks were largely flat on Friday morning as investors weighed new consumer sentiment data and awaited further progress on the Biden administration's stimulus plan. The University of Michigan said that its consumer sentiment index fell to 76.2 in the first half of February, down from a final January reading of 79 and below the Reuters consensus forecast of 80.8. The Dow fell 0.1%, the S&P rose 0.2%, and the Nasdaq rose 0.2%. Crude oil traded near $59 per barrel, while gold fell $2 to $1825 per ounce.

Stocks were mostly higher on Thursday morning, led by the Technology sector, following new employment data. The Labor Department said that first-time claims for state unemployment benefits fell to 793,000 for the week ended February 6, down from a revised 812,000 a week earlier but above the Bloomberg consensus forecast of 760,000. The Dow was flat, the S&P rose 0.1%, and the Nasdaq rose 0.4%. Crude oil fell slightly to $58.50 per barrel, while gold traded near $1838 per ounce.

The stock market rallied last week, beginning February on a strong note. Tech stocks outperformed blue chips on strong earnings from a handful of megacap technology companies. On Friday, The Dow Jones Industrial Average rose 0.30%, the S&P 500 0.39%, and the Nasdaq Composite 0.57%. For the week, the DJIA climbed 3.89%, the S&P 500 4.65%, and the Nasdaq 6.01%.

This pick list highlights constituents of the Morningstar US Mid Cap Index that we believe offer investors the best risk-adjusted return prospects. The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.

The major indices fell on Friday morning amid continued volatility in heavily shorted stocks and new COVID-19 vaccine trial results from Johnson & Johnson. J&J said that its vaccine candidate was 66% effective in preventing the spread of the virus globally (72% in the U.S.), well below the high bar set by the Pfizer/BioNTech and Moderna vaccines. However, the lower efficacy may reflect the increased prevalence of new variants of the virus during the J&J trial. On the positive side, J&J said that the vaccine was 85% effective in preventing severe cases of the disease 28 days after vaccination and 100% effective in preventing hospitalization. The Dow fell 1.3%, the S&P 1.3%, and the Nasdaq 1.2%. Crude oil traded near $53 per barrel, while gold rose $20 to $1861 per ounce.

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.

Small- and mid-cap stocks (SMID stocks) surged in the past quarter. They also have outperformed large-caps over the past 12 months and may be in a better position to generate market-beating returns going forward. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be poised to rebound more quickly once COVID-19 vaccines are widely distributed and the economy recovers. As well, the prices of SMID stocks are generally lower than the prices of large-caps. While SMID stocks can be risky, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 20%-25% of the U.S. stock market's capitalization is comprised of SMID stocks. Investors used to use a $2 billion market-cap threshold to define a small-cap stock and a $10 billion threshold for a mid-cap. We note that the Russell 2000 index now includes numerous companies with market capitalizations above $15 billion. For our purposes, we use a threshold of $20 billion to define a SMID stock.

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.

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).

Growth stocks outperformed value, again, in 2020. But in an environment of historically low interest rates (and with the coronavirus and a high unemployment rate seemingly poised to keep them low for a long time), many investors are searching for high levels of income, often be found in value stocks. During recent years, the performance record has favored growth. Since 2010, the Russell 1000 Growth Index has climbed more than 400%, compared to an advance of 200% for the Russell 1000 Value Index. In eight of the past 10 years, growth stocks topped value. That hasn't always been the case. In the previous decade, including the Great Recession, value stocks were better performers, advancing a low 8%, but still better than growth, which declined 15%. Value investors trace their roots to the famous "Security Analysis" textbook, written by Ben Graham, an economics professor at Columbia University. The tide may now be turning. Progress on COVID-19 vaccines has given a lift to some of the cyclical companies (energy companies and banks) that have lagged in recent quarters, and value stocks have kept pace with growth stocks in the past quarter. In any event, value is the place to achieve income. The current yield on the iShares Russell 1000 Value Index ETF is 2.5%, compared to the 1.0% current yield on the iShares Russell 1000 Growth Index ETF. This is not unimportant, as the current yield on the 10-year Treasury bond is 0.95%. For our list this week, we have screened our coverage universe for stocks that are BUY-rated by Argus Research analysts, have a Financial Strength rating of at least Medium, and have a yield of 3.0% or higher.

ARGUS ANALYSTS' TOP PICKS FOR 2021

This pick list highlights constituents of the Morningstar US Mid Cap Index that we believe offer investors the best risk-adjusted return prospects. The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.

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.