Week Ended Jan 15th 2021 and the Week Ahead
NOTE TO READERS: Still working on format or weekly, bear with me.
The Week Ahead
Well as they say, “I still ain’t feelin’ it”. It’s still hard for me to eagerly embrace the level of equities in the US, although the ongoing rotation into value / cyclicals at the expense of tech/WFH companies makes sense. My take is that this pandemic will not go away completely for some time, at least not as fast as investors might think. I hope I am wrong, but as we remain in the midst of some of the worst days of COVID-19, it can be difficult to see the other side. Having said this, being on the side lines or in safe haven assets has been costly since 2Q2020, and I suspect it will stay this way. We might see a sideways to slightly downward bias to give earnings a chance to catch up with valuations in the US overall. My gist is to avoid US Treasuries, take and ride the yield offered by high yield corporates (a relative call), and place your equity bets in a way that favours undervalued names in the US, and foreign markets less expensive than the (arguably) over-valued US equity markets. There’s nothing special here because it seems more and more investors are piling into this trade. Speaking of earnings, there are 43 S&P 500 companies that will report 4Q2020 results this week as the earnings season goes into full swing, worth keeping an eye on. The inauguration of newly-elected President-elect Biden in on Wednesday, and it will be a relief to see this come and go hopefully without any glitches.
As far as other economic news, China releases its 4Q2020 GDP Monday and is expected to be the only major economy to have grown in 2020 (expectations +2.1%). The graph to the right from Bloomberg shows the increasing relative growth of the Chinese economy, and the positive effect on its growth vis-à-vis the global economy due to the pandemic.
The ECB and BoJ will both release a policy statements and hold press conferences on Thursday, and there is a smattering of January economic news coming this week from Europe including the UK. Lockdowns in Europe continue to ratchet up in severity to combat the virus, and these lockdowns are expected to have negative implications of course for GDP in the bloc during 1Q2021, as the race continues to get folks vaccinated as soon as possible.
What Happened Last Week
Global equity markets were perhaps a little better the first half of the week, but then lost momentum and gave it all back – and more – as markets faded into Friday’s close. A confluence of factors, including weaker-than-expected economic news and the ongoing pandemic, weighed heavily on market sentiment. Against this backdrop, we have US equity and corporate bond valuations at highly elevated levels, at least based on historical averages. Moody’s reported in their “Weekly Market Outlook” (1/14/2021) that the value of US stocks in aggregate had surpassed $40 trillion and was now a record 185% of GDP, although the total value-to-total earnings was still below the level during the dot.com run-up (perhaps justified by much lower interest rates today – more on this later).
Against this backdrop, equities generally faltered last week aside from “value plays” including the emerging markets (MSCI EM) and Japanese (Nikkei 225) indices. However, all indices remain in the green for the year. In the US, only the Russell 2000 was positive, continuing its rather remarkable run since the autumn and far surpassing returns on the other US indices I track. Drilling deeper, rotation into SME and cyclicals is still happening, although it feels like there is a tug-of-war going on with the WFH names, perhaps understandable given uncertainty regarding the direction of the pandemic. The reflation trade lost some momentum last week, with financials and energy – the recent sector leaders – giving up ground.
In the US, President-elect Biden delivered an outline of a new $1.9 trillion fiscal stimulus plan on Thursday evening, better received than expected (although well-telegraphed) because of disappointing new jobs claims earlier that day - 965k new claims, vs consensus of 795k and previous week of 784k. Fed Chairman Powell also played his role, noting in a mid-week interview that rates would be held in check and no “tapering” of QE was on the cards, both for an extended period of time. One more thing in the States – impeachment of POTUS round 2 was rapidly agreed by the House and will move at some point to the Senate.
USTs gained modestly last week but the 10-year yield still remains above 1%. As you can see in the table below, relative nominal yields (although real yields are more important) of USTs remain solidly above 10-year government yields in the UK, the Eurozone and Japan, so perhaps increasing UST yields are drawing investors back into Treasuries, firming the currency as investors put on carry trades.
The USD did strengthen last week and has been steady for around one month now as investors decide its next move. Gold weakened whilst WTI crude was slightly better.
The week ended with the release of 4Q2020 earnings from a number of financial institutions, including JPM, Citi, Wells Fargo and Blackrock. JPM and Blackrock solidly beat consensus expectations, but there are lingering concerns across the board for financial institutions generally involving net interest margin and operating costs. Banks reversed recent trends and their stocks sold off (with performance day of release) – JPM, -1.8%; C, -6.9%; and WF, -7.8%. . You can find the very thorough S&P 500 weekly earnings report from Refinitiv here.
Credit continues to improve albeit more slowly. If you are wondering how cheap it is for corporates to borrow vis-à-vis the past, check out the table below. It doesn’t give a picture at all of the 2020 journey, but it will give you a sense of investment grade and high yield (USD and EUR) borrowing costs today vis-à-vis the past, including just after the Great Recession (2010) and during the dot.com bubble (2000). Any way you slice it, borrowing is incredibly cheap for corporates at the moment.
Lastly, COVID-19 continues to rage, with global cases surpassing 93 million and deaths surpassing 2 million. The best source for detail on this is Johns Hopkins, and you can access the Coronavirus update page here. A summary table is included at the end of this update.
Market Summary Table
COVID-19 Progression Table
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