Market Update: February 8th, 2021
Photo by Nick Linnen on Unsplash
Economic data for the week included slightly weaker results for manufacturing, but a stronger report for services. The employment situation report for January was disappointing, but other labor reports featured a few bright spots.
Global equity markets bounced back sharply last week, with the U.S. outperforming foreign by a bit. However, higher-quality bonds fell back in keeping with rising interest rates. Commodity prices rose due to spikes in the prices for crude oil and natural gas.
U.S. stocks recovered from the weakness of the prior week, as positive economic data and odds of a fiscal stimulus rose—with several key indexes again reaching record highs. As across-the-aisle talks seemed to break down, it appears that Congress may use the budget reconciliation process (requiring only a simple majority in the Senate) to get a full-sized $1.9 tril. fiscal aid package through.
Every sector ended in the positive last week, led by cyclical energy, consumer discretionary, and financials, while communications was also up sharply. Defensive healthcare gained less than a percent, due to a more defensive nature and ongoing concerns surrounding the group about potential pricing reforms from a Biden administration. Small caps continue to lead in 2021, along with the cyclical recovery expected as the pandemic comes to a hoped-for end.
Earnings results continue to roll in, with over half of S&P companies reporting final results—80% of which surprised on the upside for both revenue and earnings, per FactSet. The blended year-over-year growth rate for Q4 is a positive 1.7%, which includes both the extreme decline of early Covid and subsequent partial bounceback and a sharp improvement on the initial expectation of -9% at year-end. The strongest contribution to earnings recovery originated with financials and materials, although growth sector technology was not far behind in third place—all with 15% gains. In the last place were energy and industrials, showing extreme earnings declines over the past year.
Foreign stocks gained as well, to a lesser degree due to the stronger U.S. dollar. Vaccination rates have grown, which has elevated sentiment. In Italy, concerns over another collapsed government were helped by attempts from former ECB President Mario Draghi to form a new coalition. Emerging markets earned the strongest returns, with continued hopes for vaccine distribution translating to economic growth—in addition to more attractive valuations. Emerging markets have tended to be more cyclical by nature, so have fared well, similar to how U.S. small caps have.
U.S. bonds fell back last week, as interest rates continued to tick higher. This is due to a combination of general economic repair, and higher growth expectations for 2021-22, as well as the large size of the Congressional stimulus package. The latter has raised concerns over the size of the monetary base and potential long-term inflation, in addition to generally higher U.S. deficit and debt levels, which erode the U.S.’ credit standing. While investment-grade bonds earned negative returns, high yield, and floating-rate bank loans gained along with general positive sentiment for stocks. A stronger dollar, though, weighted significantly on foreign developed market debt, which lost nearly a percent. Emerging market bonds earned positive returns along with other risk assets.
Commodities rallied along with risk assets last week, despite a stronger dollar. The strongest energy week in several months, coupled with smaller gains in industrial metals offset flat to down results for agriculture and precious metals. The price of crude oil rose by almost $5/barrel (9%) to just under $57/barrel—due to a continuing combination of expected rising demand along with economic recovery coupled with more recent tighter U.S. supplies. Natural gas prices also spiked by over 10% with frigid temperatures expected in several U.S. regions, raising heating demand. Interestingly, there appears to be more bullishness on the commodity complex than has been seen in some time, with massive stimulus and an expected bounceback in industrial and consumer demand for products (needing raw material inputs).
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