What Happened Last Week
Perhaps the best news of the past week is that the US Presidential inauguration came and went on Wednesday without incident, hopefully marking the end of a political spectre that has gripped the US and much of the world since the election in early November. The passing of the torch to the Biden Administration led to a “relief rally” mid-week in risk assets that finally ran out of steam on Friday. China reported solid GDP growth early in the week for the 4Q2020 (+6.5%) and modest growth for FY2020 (+2.3%) more or less in line with what was expected, with the world’s second largest economy being the only major economy to grow in 2020. Janet Yellen went before the Senate Finance Committee for a grilling on Tuesday and was subsequently confirmed unanimously on Friday by the committee. Full Senate approval, which is imminent, seems almost certain as the pieces of Mr Biden’s cabinet gradually fall into place. As investors know full well, her approach – assuming she is confirmed as Secretary of the Treasury – will be very much “risk on” as far as stimulus support, with tax increases also on the cards that I suspect these will come later once the dust has settled on the pandemic. These have been well-telegraphed by the Biden Administration.
NFLX reported stellar subscriber growth, although they missed their EPS targets (shareholders letter is here). The stock rocketed ahead post-release, although I think it is slightly overdone because there are still risks on the horizon (coming from the pundit that said the same about TSLA one year ago!). The week generally lacked an equity theme because nearly everything was better, especially large tech names (see FAANG+M article I wrote mid-week here) and small/mid caps, although cyclicals slightly broke the trend aside from US automotive companies, which were strong. In fact, I could have never imagined at the end of last year that GM (+33% YtD) and F (+31% YtD) would outperform TSLA (+20% YtD) in the first three weeks of 2021!
As far as economic news, both the European Central Bank and the Bank of Japan released policy statements on Thursday, and it is frightening how similar the economies are in terms of their fragility as both struggle to see off deflationary risks once and for all. Both central banks agreed to carry on with their extensive stimulus measures as far as QE and the provision of liquidity to banks, and both held interest rates in check. You can find the ECB policy statement here, and the BoJ “Outlook for Economic Activity and Prices” here. The ECB is standing by its growth outlook of 3.9% for the bloc for 2021, whilst the BoJ is saying that it expects growth of 3.3% to 4.0% in 2021 for Japan (slight revision upwards vis-à-vis October 2020). Although standing firm on growth for the currency bloc, the ECB is warning of a potential double-dip recession as growth plummets in 1Q2021 because of ongoing CV19 lockdowns throughout Europe. For comparison purposes, US and China economic growth are expected to be around 4.2% and 8%+, respectively, in 2021. US economic data was generally better than consensus this past week, with a slew of data coming in that supports housing. Manufacturing and services data also came in above consensus expectations.
From an equity market perspective, the emerging markets index (+2.5% WoW) was again the star performer, followed by the US market (S&P 500 +1.8%) and China (+1.1%). The laggards were the European equity markets, with the FTSE 100 reclaiming its place at the bottom of the table (-0.6% WoW). In the US, the big tech names largely powered the market forward last week, with the NASDAQ up an impressive 4.2% WoW.
WTI oil fell on the week, and both gold and US Treasuries were slightly better. The US Dollar was weaker. Should you care, BTC got hammered, down 9% on the week.
The Week Ahead
As far as the week ahead, the centrepiece is likely to be the Fed’s release of its FOMC statement on Wednesday followed by a press conference. Retail sales and unemployment data is being released in Japan, and not much significant economic news is coming in Europe. In the US, discussions will likely intensify between Congress and the Biden Administration over the Administration’s proposed $1.9 trillion CV19 stimulus plan. As it stands, the proposal will inevitably be negotiated down closer to the $1-$1.25 trillion area, but it is coming and financial markets are expecting it.
My take on a few markets broadly speaking is as follows:
Equity markets, US: Will trend sideways, giving company fundamentals (revs and earnings) a chance to “catch up” with inflated valuations; would reckon more downside risk from here than upside, but wouldn’t sell. Play rotation trends, which are out there now as people pile in (so be cautious) – small/mid caps and cyclicals remain the reflation trade. I would suggest a gradual and slight tilt towards a more defensive mix of stocks, but it is risky (as far as opportunity cost) to lighten too much.
Equity markets, Europe & Japan: Slower growth than the US, some room still for catch-up as far as valuation but also more vulnerable on the downside because economic growth will lag and deflationary risks remain
US Treasuries: I wouldn’t touch them except at the short end (if I had to), inflationary pressures are just below the surface
Corporate bonds, investment grade: Solid and offers some yield, Fed-supported, but IG bonds are vulnerable to increasing UST yields
Corporate bonds, high yield: Mixed, as US economic growth should help the cyclicals / laggards, but rising UST yields will limit gains. Similar to equity rotation play perhaps, pick the right sectors / names
Gold: I am holding on to what I have as it’s a hedge against what lies ahead and the scenarios / outcomes are difficult to narrow at this point
I would love to hear what my readers think, so your comments are welcome.
There are also some important earnings coming this week both in the US and Europe. Several important bellwether companies report that are in the S&P 500 index this coming week, including: KMB on Monday; JNJ, SBUX, MSFT, GE, AMD and AXP on Tuesday; BA, APPL, FB and TSLA on Wednesday; V, MA and MCD on Thursday; and CVX, CAT and LLY on Friday. There will be a lot of messages in performance versus consensus and the outlook in each case, as these companies span a variety of sectors.
The last topic I will touch on is COVID-19. The vaccines are rolling out at various speeds in different countries, with the US most focused on establishing leadership in the post-Trump era at the federal level. Still, it must be kept in mind that the US is a large country with much diversity as far as medical infrastructure (varies state-by-state), and in my opinion, the actual administration of the vaccines will need to occur at state level. Still, the federal government needs to draw up guidelines applicable to the entire country, such as the sequencing of who gets vaccines and when, and to make sure that the vaccines are distributed fairly across all 50 states. As far as the progression of the virus, we remain on a similar pace to the last few week, with about 4-5 million new cases globally/week and around 90,000-95,000 deaths/week. The Johns Hopkins COVID-19 website is here, should you wish to dig deeper.
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