January Market Overview
We kicked off January with early gains in stocks, but volatility in the final week resulted in most indexes closing modestly down for the month (most Large Cap indexes declined by 1% or less). Small Caps, however, stood out yet again with gains of around 5% in January, while Emerging Markets were also relatively strong and posted gains of around 3% for the month.
Early on, the Democrats’ victory in Georgia, which resulted in control of the Senate, proved to be a catalyst for stocks, as an additional significant stimulus bill came to be viewed by investors as a virtual certainty. While discussions of the proposed stimulus package remain ongoing, there are many provisions being discussed, such as additional stimulus checks and greater unemployment benefits, which would support consumer spending and would continue to bolster the economy in the near term. Longer term, we expect the Biden administration to pursue increased taxes on both corporations and high-earning individuals, which would partially offset some of the near-term benefits of the large government-fueled spending that is being contemplated.
Of course, COVID-19 has continued to present many challenges for businesses and families across the world, though we are encouraged that the vaccine rollout has progressed, and we remain hopeful that this will help bring the pandemic under control. As of this writing, there have now been 100 million doses of the vaccine administered worldwide, approximately equal to the number of people that have been infected with COVID-19.
We believe the support of central banks and government spending through the pandemic has significantly bolstered the foundation for an economic recovery as the world becomes inoculated against COVID-19 and the virus’s reach dissipates. That said, we remind readers that investors are already anticipating significant fundamental improvements this year, so our view for the markets must contemplate not only our favorable economic view, but also how it compares to what’s reflected in the valuation of stocks.
In that vein, throughout the month, many companies began reporting their fourth quarter earnings results and providing guidance for the current year. Overall, of the companies that have reported so far, most have beat analysts’ expectations; however, our observation has been that, in many instances, investors were already contemplating strong results, and the stock reactions have been somewhat muted.
Across Fixed Income, returns on short-term bonds were essentially zero, while most bonds with intermediate and longer maturities declined somewhat as the yield curve steepened based on the outlook for more favorable economic growth. Municipals rose across all maturities, which is likely attributable to the discussion of a stimulus package that would provide several hundred billion dollars of aid to state and local governments.
Finally, we would like to take the opportunity to address the attention that stocks like GameStop, AMC, and others have received in recent weeks. These stocks are heavily shorted – meaning that there are many investors betting against these stocks who make money when they go down – and, conversely, lose money when they go up. An online community of individual investors has banded together to buy shares in many of these companies, with many other retail investors following suit, which drove the prices of these stocks up. As the stock prices climbed, the investors that shorted these shares began losing significant amounts of money and felt compelled to buy shares to unwind their short positions, therefore driving the prices up even further in a “short squeeze.” This dynamic has caused a remarkable rally in these stocks, and while many individuals may want to jump on the bandwagon, we cannot express strongly enough how risky these strategies are. This phenomenon created a situation where the valuation of these companies completely decoupled from the fundamental merits, and we do not expect these trades to end well.
The monthly Market Overview is written by two members of MACRO’s Investment Committee, Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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