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Week in Review: January 1, 2021

Recap & Commentary

Markets ended 2020 on a high note, with the S&P 500 closing the holiday-shortened week at a new record high. Other notable indices closing at record highs included the Dow Jones Industrial Average and MSCI World Index. Markets benefitted from President Trump signing into law the $900B coronavirus relief package, which provides needed help to business and individuals, and the $1.4T budget, which avoided a government shutdown and funds the government through the end of its fiscal year in September.

Despite all that occurred during the year, 2020 proved to be very good for investors. After falling by over 30% at the depths of the March selloff, the S&P 500 then staged a remarkable 68% rebound, to end the year up 16.3%. Other asset classes also enjoyed strong returns. Small caps ended the year up 18.4% thanks to a 31% surge in the fourth quarter. International markets also enjoyed positive returns with developed and emerging markets gaining 5.4% and 15.8%, respectively, for the year.

Following such strong gains, coupled with declining earnings, valuations enter 2021 looking rather stretched. However, when viewed through the lens of low inflation and record low interest rates, valuations seem more reasonable. In 2021, we expect earnings growth to exceed price returns, thereby allowing equities to grow into their current valuations.

The recent surge in coronavirus cases, and attendant deaths, continued largely unabated. As of Sunday, US cases had surpassed 20.5M, while deaths surpassed 351K. California became the third state, along with New York and Florida, to exceed 25K coronavirus deaths. In the UK, regulators approved the use of AstraZeneca’s vaccine.  The company believes that it can produce ~3B doses by the end of 2021.

Economic Bullet Points

A light week for economic news was highlighted by housing data. Echoing the slowdown seen last week in new and existing home sales, pending home sales fell ~2.5% in November. That was lower than the expected 0.2% decline, and last month’s 0.9% drop. Home prices as measured by the Case Shiller home price index rose 1.6% in October. Compared to a year earlier, prices rose 7.9%, the fastest pace since June 2014.

Weekly jobless claims improved slightly from the prior week, declining from 806K to 787K. The consensus expectation had been for an increase to 833K.  Continuing claims also defied expectations for a slight increase by dropping from 5.32M to 5.22M.

As we enter 2021, our expectation is for economic activity to gradually improve as coronavirus vaccines become more widely distributed and consumer activity normalizes.  However, we do not expect overall GDP growth to rebase at some structurally higher level than the ~2.5% we have experienced over the past decade. Over longer time periods GDP is driven by increases in the labor force and productivity, neither of which currently portend structurally higher growth.

Of Note

Approximately 480 companies went public in 2020, the most since 1999.  Special Purpose Acquisition Companies (SPACs) accounted for just over half (248).

Market Indices Week of 01/01

S&P 5001.4%
Small Caps-1.5%
Intl. Developed1.4%
Intl. Emerging2.9%
Commodities1.3%
U.S. Bond Market0.2%
10-Year Treas. Yield0.91%
US Dollar-0.4%
WTI Oil ($/bl)$49
Gold ($/oz)$1,895

The Week Ahead

  • Dec. Employment Report
  • ISM Manufacturing
  • ISM Services
  • Weekly Jobless Claims
  • Trade Balance
  • Factory Orders

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