Economic Data Watch and Market Outlook
Equity markets resumed their 2021 “everything” rally last week, as vaccine and stimulus expectations have outweighed complacency concerns. Investors are buying on the dip, limiting downside market moves. This current trend reminds me of Sir Isaac Newton’s second law of motion, which states a change of momentum in magnitude and direction is caused by a force imposed on it. Equity markets continue to rise despite stretched valuations, high levels of investor leverage and a rally that has seen 60% to 70% of all market stocks showing gains. The market’s surge is being abetted by the Washington troika of President Biden, Fed Chair Jerome Powell, and Treasury Secretary Janet Yellen. The group is on a multi-year mission of providing as much monetary and fiscal stimulus needed to attain full employment and push inflation higher by 2023. In addition, we are also on a multi-quarter process to deploy the necessary amounts of vaccine to achieve herd immunity. Equity markets should continue to move higher for at least 1H 2021 on the back hyper stimulus, being in the early stages of the business cycle recovery, and expectations for double digit earnings growth. However, the Sir Isaac Newton moment may come for equities when the Fed begins to consider the long-feared policy of ‘tapering”. Street economists are forecasting such talk could commence in the third quarter.
As we enter next week’s trading sessions, investors in a President’s Day shortened week will continue to monitor progress on the $1.9 trillion proposed stimulus package, the on-going ramp up of the COVID-19 vaccine distribution plan, and corporate earnings. The Biden stimulus package with portions of the bill approved by the House Ways and Means, Education & Labor committees, hope to have a full House vote by the end of February and signed by President Biden by mid-March. On the COVID-19 front, daily vaccinations have risen from 900,000 in late January to 1.5 million last week, and the Biden Administration just purchased another 200 million doses to continue the drive for herd immunity. Regarding corporate earnings, with 74% (344 companies) of the S&P 500 having reported, 80% and 78% of companies have beaten their earnings and revenue estimates. The blended earnings for the Index are +2.9% versus the -9.3% consensus projection from December 31, 2020. The average earning’s beat has been 15.1%, and nine out of eleven sectors have exceeded earnings expectations. Over the short term, with valuations higher and investor complacency at a 20 year high according to JPMorgan, we should expect some type of consolidation in the coming weeks.
In turning to the coming week’s economic calendar, the primary focus will be on PMI, housing, inflation, and retail sales data. On Wednesday with begin with the January report of Retail Sales, which is projected to have increased by 1.4%. Spending last month should benefit from the receipt of stimulus checks by consumers, which was approved as part of the late-December stimulus package.
The Producer Prince Index (PPI) for January is estimated to have risen by 0.3%. The Index was pushed higher by the projected 2.6% jump in energy prices, and food prices are expected to increase by 0.4% on the month as well.
On Friday, the February Markit Manufacturing PMI composite is projected to slip by 0.2 point down to 59.0. The drop was mostly likely caused by the temporary closing of several auto plants due to parts shortages. The Markit Services PMI last month rose by 0.2 points to 58.5, prompted by the decline in new COVID-19 cases. January Existing Home sales close out the week, with an estimated drop of 3.1% to 6.55 million units.
The Week In Review
U.S. Equities
US equity markets rose last week on hopes of Congressional approval for President’s Biden $1.9 trillion stimulus plan, and the drop in new COVID-19 cases and hospitalizations.
US Index Performance
- Dow Jones +1.11% MTD +5.05% YTD +3.00%
- S&P 500 +1.28% MTD +6.01% YTD +4.94%
- Russell 2000 +2.54% MTD +10.45% YTD +16.01%
- NASDAQ +1.73% MTD +8.44% YTD +9.37
Drivers: I) January’s Consumer Price Index (CPI) rose by 0.3%, led by a 3.5% surge in energy prices and an uptick of 0.1% in food prices. The core index, ex-food, and energy was moderately higher by 0.03%. The COVID-19 pandemic has caused a slowdown in core inflation, as the measure was up 2.3% annually in January 2020, and has fallen to a 1.4% rate in January 2021. The drop the tenant rents, lodging prices and airfares have led the way.
II) Federal Reserve Chair Jerome Powell spoke late week on the benefits of a strong labor market. He stated that a consistently strong labor market “can deliver substantial economic and social benefits” and “at present, we are a long way from such a labor market.” These statement support the dovish tone that the FOMC has been sending for many months, which should keep short rates at low levels for the next few years.
III) The Jobless claims data for the seven day-period ending February 6, showed a drop of 19,000 to 793,000 but was higher than the consensus estimates of a decline to 760,000. Unemployment remains high, despite the increase distribution of the COVID-19 vaccine. When you combine state and Federal claims, new applications came in at 1.15 million, far above the pre-pandemic levels in the low 200,000’s.
IV) In February, the University of Michigan Consumer Sentiment Index fell to 76.2 from 79.0 in January. The survey has declined the last two months despite the passage of new stimulus in late December, the increase in vaccine distribution and decline in new COVID-19 cases. The survey also shows an increase in the short-term inflation outlook, a reaction probably tied to the recent rise in gasoline and food prices.
V) Equities Month to Date are higher with Small-Cap, Growth, Energy, and Communication Services leading equity price performance. The laggards for the period are Large-Cap, Value, Healthcare and Utilities.
Capitalization: Large Caps +6.55% (YTD +5.68%), Mid-Caps +8.61% (YTD +8.32%) and Small Caps +10.45% (YTD +16.01%). Style: Value +8.66% (YTD +11.57%) and Growth +9.23% (YTD +12.69%). Sector Groups: Energy +13.51% (YTD +17.79%), Communication Services +9.85% (YTD +9.60%), Financials +8.78% (YTD +6.94%), Information Technology +7.57% (YTD +6.77%), Consumer Discretionary +5.10% (YTD +5.91%), Technology +7.44% (YTD +6.44%), REITs +4.33% (YTD +4.87%), Healthcare +1.90% (YTD +3.33%), Materials +5.17% (YTD +2.69%), Industrials +6.45% (YTD +1.86%), Utilities +0.73% (YTD -0.20%), and Consumer Staples +2.49% (YTD -2.62%)
European Equities
The MSCI Europe Index climbed higher on the week as corporate earnings in the Euro-zone have exceeded expectations, and former ECB President Mario Draghi received support to form a new Italian government.
Drivers: I) The German government’s lockdown order was extended to March 7 last week. Schools and nurseries may reopen at a quicker pace if approved by individual German states. The lockdown is strict, with social meeting limited to only one person from outside the household. Individuals are advised to remain at home and work from home. All nonessential shops, restaurants, hotels, and all leisure, shorts and arts facilities remain closed.
II) Core inflation in the Euro-zone for January vaulted higher by 2% to 1.4% year over year. The sharp increase in the core inflation rate is a by-product of the increase of Germany’s VAT, which has been temporarily lowered during the pandemic. The overall outlook for Euro-zone core inflation calls for an average of 1.4% for 2021, while the core rate is projected to decline next year to a 1.0% rate year over year.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.80% for the week (MTD +4.17% YTD +2.68%).
Asian Equities
Asian markets were higher last week on improvements in corporate earnings and revenues, and expectations that new fiscal stimulus in the US will raise global growth. The DJ Asia Index was higher by +2.67% for the week, (MTD +8.05% YTD +9.75%).
Drivers: I) In Japan, December saw a decline in monthly wages by -3.2% on an annual basis, after seeing a -1.8% drop in November. The pullback which exceeded estimates of -2.5% was driven primarily by the decline in winter bonus payments versus the previous year. At the same time, there was a decrease in overtime pay, which fell by -8.9% on an annual basis, which follows the decline of -10.8% in December. The fall in wages is blamed on the extension of COVID-19 lock-downs which has been a drag on economic activity.
II) In China, January’s headline CPI dropped into deflation territory, sliding lower by -0.3% year over year. The report’s underlying data shows that food prices in general rose by 1.6%, but non-food prices fell by -0.8% and service prices by -0.7%. On the flip side, PPI rose by 0.3% in January. The outlook for PPI calls for a slowing, as service price inflation remains tepid due to travel restrictions which remain around the Lunar New Year.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +2.58% (MTD +6.71% YTD +7.57%), the Hang Seng Index was higher by +3.02% (MTD +6.68% YTD +10.79%) and the Shanghai Composite was advanced by +4.54% (MTD +4.94% YTD +5.24%).
Fixed Income
Treasury yields saw the 10-year rise to its highest level in a year due to concerns that the mounds of fiscal and monetary stimulus will eventually lead to higher levels of inflation. The 30-year yield rose briefly above 2.0% during the week, as the $27 billion auction last week had lackluster demand.
Performance: I) The 10-year Treasury yield rose last week ending at 1.209% up from 1.168%. The 30-year yield advanced last week finishing at 2.014% rising from 1.974%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.13% last week, MTD -0.52% and YTD -1.23%. The Bloomberg Barclays US MBS TR was lower by -0.17% last week, MTD -0.18% and YTD -0.10%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.30% for the week, MTD +1.01% and YTD +1.34%.
Commodities
The DJ Commodity Index rallied last week by +2.34% and is up month to date +5.43% (YTD +9.25%). Commodity prices continued to rise last week, as oil and industrial metal prices remained strong on expectations the COVID-19 vaccine will accelerate global growth and the demand for commodities.
Performance: I) The price of oil rose last week by +4.66% to close at $59.73 and is higher month to date by +14.55% (YTD +23.10%). Oil surged in price last week on rising Middle East tensions, as Iranian backed Houthis rebels staged a drone attack on an airport and military airbase in Saudi Arabia.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.60% ending at 90.45 for the week (MTD -0.09% YTD +0.58%). The USD declined last week on increasing expectations the global expansion will lead to stronger growth outside of the US.
III) Gold rose last week for the first time since late January, as disappointing US consumer sentiment unexpectedly fell. Gold rose in price by +0.51% last week, climbing to $1824.8 (MTD -1.36% YTD -3.72%).
Hedge Funds
Hedge fund returns in February are positive for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy higher.
Performance:
- The HFRX Global Hedge Fund Index is higher at +2.28% MTD (+2.11% YTD).
- Equity Hedge advanced by +3.45% MTD (+2.37% YTD).
- Event Driven is up MTD +2.34% (+2.98% YTD).
- Macro/CTA has risen by +2.34% MTD (+1.75% YTD).
- Relative Value Arbitrage is higher by +0.92% (+1.24% YTD).
- Multi-Strategy is up MTD by +0.80% (+1.05% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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