Economic Data Watch and Market Outlook
Global equity markets last week reminded us of the life-long mantras, “everything in moderation” and “lead a balanced life”. In an investment environment filled with potential speed bumps for the week (President Biden’s inauguration, Q4 earnings, economic data), the three major US indices hit new all-time highs on Wednesday. From election day November 3rd to inauguration day January 20th, the S&P 500 gained about 13.0%, which is the best period showing since Herbert Hoover’s ascendancy to the presidency in 1928. Much of the market’s price propellant was provided by the official unveiling of the $1.9 proposed COVID-19 stimulus package by President Biden, and extremely dovish commentary by Janet Yellen during her confirmation hearing on Tuesday. Treasury Secretary Nominee Yellen strongly voiced the need for higher COVID-19 stimulus spending or “risk longer, more painful” economic downturn, while also emphasizing higher taxes were not a short-term priority for the new administration. The no new tax statement caused a sizable rotation in equity markets, as previous laggards’ growth and mega technology staged a strong rally, while the early 2021 market leaders including energy, financials and materials pulled back. Market’s led by the Fab 5, Alphabet (+9.8%) Facebook (+9.7%), Apple (+8.4%), Microsoft (+7.0%) and Amazon (+6.1%), seem to follow the mantras we mentioned in their call for balance. Thus far 2021 has shown the need for balance, as both value and growth have had their turn to lead.
As we enter next week’s trading sessions, investors will be inundated with a busy economic calendar, guidance on monetary policy from the year’s first FOMC meeting and a heavy slate of corporations reporting Q4 earnings. Earnings next week will be dominated by tech giants Microsoft, Apple as well as Telsa. Notable companies in healthcare reporting are Johnson & Johnson, Abbott Laboratories and Eli Lilly. Thus far with 14% (68 companies) of the S&P 500 companies having reported, the blended earnings are -4.7% versus the December 31, 2020 initial estimate of -9.2%. Approximately 86% and 82% have beaten their earnings and revenue projections respectively, with the average earning surprise coming in at +22.4%.
In turning to the coming week’s economic calendar, the data will be consumer centric with the releases of consumer confidence, consumption and spending scheduled for the week. On Tuesday, the January reading of the Conference Board consumer confidence index is estimated to have dropped by 1.1 points to 87.5. Sentiment has waned due to the sharp increase in new coronavirus cases.
On Wednesday, the December Durable Goods Orders are projected to rise by 0.8%, with the increase led by improving aircraft orders and shipments. Core capital gains have rebounded strongly since Q1 2020, but recent growth rates are moderating as the current expansion has slowed.
Real Consumer Spending released on Friday, is expected to report a decline of -0.5% while nominal spending dipped by -0.1%. The resurgence of the pandemic has negatively impacted consumer activity, which led to a drop in food services spending in December. The PCE price index is projected to show an increase of 0.3% with the core reading rose by 0.18%. The PCE deflator is expected to be up 1.1% while the core is estimated to be up 1.3% on an annualized basis, both firmly below the 2.0% FOMC target.
The Week In Review
U.S. Equities
US equity markets rallied on the week, as promises of more stimulus from President Biden and dovish comments from Treasury Secretary Nominee Yellen offset the negative of rising COVID-19 cases.
US Index Performance
- Dow Jones +0.63% MTD +1.37% YTD +1.37%
- S&P 500 +1.96% MTD +2.36% YTD +2.36%
- Russell 2000 +2.15% MTD +9.84% YTD +9.84%
- NASDAQ +4.19% MTD +5.08% YTD +5.08
Drivers: I) On Friday, President Biden signed two executive orders to provide financial support to lower income Americans, as he pushed Congress to move ahead with his proposed $1.9 trillion stimulus plan. The executive orders aim to increase food benefits for needy Americans, clearing the path for federal employees to receive a $15 per hour minimum wage. The second order is expected to increase food benefits for low-income Americans.
II) The December Housing Starts jumped by 5.8% to 1.669 million units, while related building permits climbed by 4.5% to 1.709 million units. The rise was supported by the strong increases in single family units, which saw a 12.0% and 7.8% rise in starts and permits respectively. The solid housing data during the end of 2020, should be a positive precursor for construction activity for Q1 2021.
III) The January flash reports for Markit’s PMI surveys showed strong results for the month. The strong showing should be favorable for Q1 economic growth, as the manufacturing survey rose from December’s 57.1 to 59.1 in January. The PMI services survey posted one of its strongest results in recent years, by jumping from 54.8 in December to 57.5 in January. Services were led by an increase in business expectations and input prices.
IV) The report of December’s Existing Home Sales showed an increase of 0.7% to 6.76 million units on a seasonally adjusted annual rate. Sales have been volatile in recent months, but activity has been extraordinarily strong with sales soaring by 50.0% on an annual basis in Q4. With strong sales and the limited amount of inventory, prices for the median sale price have surged by 13.0% year over year in December 2020.
V) Equities Month to Date are higher with Small-Cap, Growth, Energy, and Con. Discretionary leading equity price performance. The laggards for the period are Large-Cap, Value, Con. Staples, and Industrials.
Capitalization: Large Caps +2.67% (YTD +2.67%), Mid-Caps +3.98% (YTD +3.98%) and Small Caps +9.84% (YTD +9.84%). Style: Value +7.03% (YTD +7.03%) and Growth +8.54% (YTD +8.54%). Sector Groups: Energy +11.03% (YTD +11.03%), Consumer Discretionary +5.78% (YTD +5.78%), Healthcare +3.62% (YTD +3.62%), Financials +2.96% (YTD +2.96%), Communication Services +2.85% (YTD +2.85%), Materials +2.79% (YTD +2.79%), Information Technology +2.50% (YTD +2.50%), Technology +2.06% (YTD +2.06%), REITs +0.65% (YTD +0.65%), Utilities +0.19% (YTD +0.19%), Industrials -0.12% (YTD -0.12%), and Consumer Staples -3.56% (YTD -3.56%).
European Equities
The MSCI Europe Index rose last week as the ECB stated monetary policy would remain accommodative, and hopes the proposed $1.9 trillion US stimulus plan will gain legislative momentum and boost global growth.
Drivers: I) The Eurozone composite PMI for January dropped 1.6 points to 47.5, which was worse than the consensus estimate. The increase in COVID-19 restrictions at the beginning of 2021 was behind the decline. The New Orders Index, which is an early indicator of economy activity, remained at a relatively high level, dropping by -0.9 to a still solid 63.6. But overall data is calling for declines of -7.0% ar and -1.5% ar in GDP for Q4 and Q1.
II) Eurozone Consumer Confidence declined by 1.6 points to -15.5 in January, which is a historically low level. The tighter COVID-19 restrictions implemented in October/November were responsible for another drop of 4 points, before recovering in December. Activity data has shown an improvement in goods spending since early Q2, while services have shouldered the brunt of the lockdown restrictions.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.81% for the week (MTD +2.00% YTD +2.00%).
Asian Equities
Asian equities rose on hopes that the rollout of the COVID-19 vaccine can bring back a semblance of a normal life, while the inauguration of President Biden could accelerate passage of the proposed $1.9 trillion US stimulus package. The DJ Asia Index was higher by +1.80% for the week, (MTD +6.37% YTD +6.37%).
Drivers: I) In Japan, the Reuters Tankan business survey showed manufacturers continued their recovery in January, while non-manufacturers have lagged. The BOJ Tankan composite was unchanged at -6 in January compared to -7 in December. The manufacturers’ current condition component improved from -9 to -1, which is its best level since July 2020. The jump was led by general machinery which soared 29 points to 7, reflecting the rebound in consumer goods businesses. Non-Manufacturing dropped from -4 in December to -11 in January, driven primarily by the jump in COVID-19 infections which hit retailers and transportation.
II) In China, the Q4 GDP result beat expectations by rising 5% on an annualized basis, up from the 4.9% reported in Q3. On a seasonal adjusted basis, GDP grew by 14.9% quarter over quarter during Q4, which is up from 7.1% in Q3. The report showed solid growth in industrial production and exports, while retail sales and fixed asset investment came in slightly below expectations. Industrial production was strong growing 0.7% m/m.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.39% (MTD +4.33% YTD +4.33%), the Hang Seng Index was higher by +3.08% (MTD +8.14% YTD +8.14%) and the Shanghai Composite was higher at +1.13% (MTD +3.85% YTD +3.85%).
Fixed Income
Treasury yields were primarily lower last week as markets digested slowing economic data due to the impact of new lock-downs caused by the pandemic.
Performance: I) The 10-year Treasury yield fell last week ending at 1.086% down from 1.090%. The 30-year yield rose last week finishing at 1.849% climbing from 1.836%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.01% last week, MTD -0.75% and YTD -0.75%. The Bloomberg Barclays US MBS TR was lower at -0.01% last week, MTD +0.01% and YTD +0.01%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.13% for the week, MTD +0.48% and YTD +0.48%.
Commodities
The DJ Commodity Index declined last week by -1.67% and is up month to date +2.54% (YTD +2.54%). Commodities prices declined last week as the new COVID-19 induced lockdowns in the US, Europe and Asia led to fears of a global economic slowdown, causing industrial metals such as copper and platinum to drop.
Performance: I) The price of oil fell last week by -0.11% to close at $51.98 and is higher month to date by +7.13% (YTD +7.13%). Oil dropped due to a sharp increase in US inventories, and the rise in new COVID-19 cases have prompted new lock-downs which can curb economic growth and the demand for oil.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.63% ending at 90.21 for the week (MTD +0.31% YTD +0.31%). The USD fell as the unveiling of the proposed $1.9 trillion stimulus plan from President Biden prompted concerns over the massive rise in US debt.
III) Gold was higher last week as newly inaugurated President Biden presented a new $1.9 trillion spending plan to combat COVID-19,which engendered hopes of reinflating the US economy. Gold rose in price by +1.52% last week, rising to $1855.5 (MTD -2.09% YTD -2.09%).
Hedge Funds
Hedge fund returns in January are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy positive for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.15% MTD (+1.15% YTD).
- Equity Hedge has advanced by +1.55% MTD (+1.55% YTD).
- Event Driven is up MTD +1.38% (YTD +1.38%).
- Macro/CTA has risen by +1.16% MTD (+1.16% YTD).
- Relative Value Arbitrage is higher by +0.48% (+0.48% YTD).
- Multi-Strategy is up MTD by +0.35% (+0.35% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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