Updated January 15, 2021
Our investment team remains committed to sharing regular updates and market insights to keep you informed. Please look for our next update on February 5.
Equity Markets Trend Higher
Equity markets started the year on a solid note, with all major indexes up over 1 percent. Following a trend we witnessed at the end of last year, the rally has been broad based. Areas such as energy, financials, small-cap stocks and international equities, which lagged the broader market for much of 2020, have been the leaders. Mega-cap tech stocks, such as Apple, Microsoft, Facebook and Amazon, have actually under-performed. This is just another reminder why a broad, diversified portfolio remains a prudent investment strategy.
10-Year Treasury Yields Breach 1 Percent
Intermediate bond yields have made a significant move higher after being near all-time lows for much of the second half of 2020. The 10-year treasury yield, which had been at 0.77 percent prior to the election, moved over 1 percent for the first time since last spring. It hit a high of 1.18 percent earlier this week before pulling back. Short-term interest rates have remained at very low levels, as they are mostly dependent upon the Federal Reserve. Intermediate and long-term rates are strongly influenced by future inflation expectations. While a 10-year yield just above 1 percent does not portend sharply higher inflation at this time, rising yields are something to watch in 2021.
Economic Data Mixed
Recent employment reports have been disappointing, with one showing a loss of 140,000 jobs in December. This was the first drop since last April. The unemployment rate remained at 6.7 percent. The NFIB Small Business Index gave up nearly half its gains from the April low in December. However, the ISM Manufacturing and Non-Manufacturing indexes both showed strong gains in December and construction spending beat expectations. The mixed data may reflect an air pocket in the economic rebound due to the surge in COVID-19 cases. We expect any air pocket to be a temporary slowing of growth, not a derailment of it.
Since this is our first Investment Update of the year, we wanted to provide our thoughts on what lies ahead. There are two dominating factors driving markets: the COVID-19 virus and unprecedented fiscal and monetary stimulus. The statistics regarding the virus remain alarming; we are currently at new highs in cases, hospitalizations and mortalities. The vaccine rollout has largely been a disappointment, however it appears to be gaining steam. Portions of the economy, such as travel and entertainment, remain dormant. Labor markets will not fully recover until these parts of the economy open.
Timely and unprecedented stimulus last spring helped bring markets back from the abyss. While the economy has largely bounced back from the lows, many individuals, businesses and industries required further assistance. Monetary and fiscal stimulus, both here and abroad, continue to roll out at an unprecedented level. As we saw during the Great Recession, on a much smaller scale, stimulus has an outsized effect on asset prices, including equity markets. While the long-term effects of the stimulus and associated debt will take years to come to fruition, the near-term effects are likely to be positive for markets.
Our outlook is relatively positive to begin the year, but we are monitoring factors that could cause us to reevaluate our outlook in the coming months. Any issue with vaccines tops the list, as vaccines appear to be the single most important factor in getting us through the crisis. Significantly higher levels of inflation is an additional factor. Overall, inflation currently remains tame; however, we are seeing some areas, such as raw materials, where prices are increasing significantly. Ten-year treasury yields rising significantly higher than expected may also spook equity markets. Finally, oil prices rising to the $80-$90 a barrel range would be concerning for markets.
What Should I Be Doing With My Investments?
We encourage you to pay attention to the latest developments, but not to lose sight of your long-term investment strategy. Reach out to our investment team to discuss your options and reaffirm your timeline and goals. Call our investment team at (518) 415-4401.