Hopes that the conclusion of 2020 would bring with it brighter days were quickly dashed by escalating COVID cases, vaccine missteps, and the first hostile breach of the Capitol Building since the War of 1812. Yet, despite all of this, the stock market has picked up right where it left off in 2020, defiantly charging forward.
2020 was an important reminder for investors that “stocks” and “economy” are not synonymous. It is possible to have a poor economy and a strong stock market. Never was that more evident than 2020. Massive monetary stimulus from the Federal Reserve, combined with fiscal stimulus from Congress, and the lack of alternatives to equities drove stock prices up. Think of 2020 the next time the urge comes to take money off the table when newsflow deteriorates. Market timing is a dangerous gamble. We prefer to focus on capturing the natural opportunities the market offers throughout a cycle rather than predicting the unpredictable. We call that evidence-based investing!
Headlines This Week
- The equity markets briefly paused after the historical events on Capitol Hill, but the bulls would not be stopped. Investors are positioning their portfolio for the expected economic recovery, with many anticipating major actions from the government, such as more stimulus and infrastructure spending.
- “Recovery” asset classes, like Small-Cap stocks (up over 6%) and Large-Cap Value (up almost 4%), swiftly charged ahead.
- In the first week of trading, 2020’s lagging sectors Energy, Materials, and Financials have set the stage. Investors are looking forward to a robust economic recovery in 2021.
- The 10-Year U.S. Treasury yield moved above 1% for the first time since March of last year. While still nowhere near the 1.8% level it started at in 2020, the move brought bonds back into the discussion. Yields go up as bond prices fall.
- The textbook selling of bonds is accompanying the march to new highs in stock markets. Hopes of an improving economy are accompanied by fear of deficits and inflation.
- As yields rise and returns from bonds get more appealing, the “TINA” (There is No Alternative) case for stocks may weaken.
- Emerging Markets and Developed International are also showing life. As the dollar’s strength weakens, it is a big relief for countries holding U.S. Dollar-denominated debt, as it helps to decrease their bills.
- While traveling abroad is still difficult now, I am sure many can picture themselves on the beach with a cold drink in hand. Many expect that when travel returns, it will return with a boom.
U.S. Unemployment rate
Source: U.S. Bureau of Labor Statistics
- The U.S. lost 140,000 jobs in December, while the previous two months were revised to add 135,000.
- While December employment data is not encouraging, one month of data is far from a trend.
- The decline in jobs came from leisure/hospitality and government, while job growth came from manufacturing, construction, and services.
- The unemployment rate remained at 6.7% vs. consensus of 6.8%.
The Week Ahead
Inflation Holding… For the Moment
The Bureau of Labor is releasing its US Consumer Price Index (CPI) data for December on Wednesday and the Producer Price Index (PPI) on Friday.
- Forecasts expect the CPI rate to tick up to 1.3% in December, up from 1.2% the previous month, and a small uptick in the PPI.
- Investors will be eyeing inflation closely to see if any significant acceleration will occur.
- Over the longer-term, acceleration in inflation will determine the length of near-zero rates the Central Bank targets.
Ending on a Downbeat
The UK is set to release its monthly Gross Domestic Product (GDP) update on Friday, with its expectation being in negative territory, around -4% from the previous month. Germany is also slated to report a similar GDP decline.
- New strict lockdowns in the UK to curb the spread of a novel strain of Covid has hampered economic recovery efforts.
- While the outlook is negative, the data is for November when the UK went back into lockdown. This could be viewed as stale data, so the information is potentially already priced in.
Next week is quite the data dump, with several second-tier indicators being released.
- Included will be the Michigan Consumer Confidence Index for January, expected to fall slightly.
- China will be revealing its Consumer Price Index on Monday, which is poised for a slight increase.
- The Fed’s Beige Book will be released on Wednesday. This bi-quarterly report gives insight into the current US economic situation with commentary from each of the 12 Federal Reserve Districts.
- Retail Sales for December, Import/Export Price Index, and Weekly Jobless Claims may also catch some headlines.
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.6 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.