Monthly Markets Memo - January 26, 2021
by Dan Zalipski, CFA
2020 will be a year for the history books. The extreme disruption the global economy experienced throughout the year due to the Pandemic was unprecedented. We saw unemployment claims surge to levels never thought possible as local economies slammed the brakes to shelter-in-place. The S&P 500 plunged 32% from its February peak to its March low. Governments stepped in to provide support to help both businesses and individuals confront the challenge. This kicked off a market rally in the face of extreme uncertainty, with the S&P 500 finishing 2020 at an all-time high, adding 18% from where it started the year.
As we start 2021, the focus is on the vaccine. Doses are being distributed, focusing on front-line workers and seniors. There are expectations that the general public will gain access as we get closer to the summer. The market is also looking at the new Biden administration and potential moves they may be making in the early days of his term. They have already been promoting a $1.9T Covid-19 relief stimulus that includes more direct payments to individuals, extended enhanced unemployment benefits, support for small businesses, and additional money for both Covid-19 testing and vaccines. The stimulus, combined with the Fed’s pledge to keep rates low, are expected to continue supporting markets during the ongoing economic recovery.
Many are attempting to identify what could throw some cold water on this market. One potential culprit is simply the excessive risk-taking investors are engaged in to seek out gains. The risk-taking is in part driven by both cash and bonds struggling with low yields, forcing investors to look elsewhere for gains as the Fed holds down rates. As this action drives valuations higher, calls for caution follow.
Another risk on the radar are bond yields. If low yields are pushing investors to riskier equities, higher yields could draw them back. Since the beginning of 2021, the yield of the 10-year Treasury has increased from 0.95%, touched 1.18%, and has settled closer to 1.10%. That is quite a move for 10 trading days. Despite the Fed pledging to keep rates low, there are factors outside of their control that can push rates higher, such as inflation or an increase in government spending. The aforementioned Biden stimulus deal is expected to put thousands of dollars into bank accounts of individuals and households across the country. An injection of cash directly to consumers certainly has the potential to put upward pressure on inflation. The government may find itself pushing rates higher as they borrow more money to pay for the stimulus.
Stocks are getting all the attention as buyers scoop up shares. Investors may feel like they have few choices for returns as cash and bonds earn next-to-nothing. Low rates and government stimulus should continue to support the market, but it would not be unusual to see a market correction (defined by a 10% drop from the most recent high) the longer the exuberance continues. A meaningful pickup in either inflation or rates would warrant a reassessment within the markets, but until then, stay the course, stay invested, stay diversified.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and/or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete, or accurate. Investments carry the risk of loss including loss of principal. Past performance is never a guarantee of future results.