Week Ended Jan 8 2021 and the Week Ahead
I am trying a new format as the year begins for the emorningcoffee.com weekly update, consisting of more concise text and a more comprehensive summary of the prior week. The written text will be divided into two sections: i) the highlights of the week just past, and ii) the major events of the week ahead and my views. Following the commentary is a summary table of data and a CV19 table. Feedback is welcome.
What Happened Last Week
It was indeed a very noteworthy first week of 2021. Just when you thought things couldn’t get stranger than in 2020, they did. Three things stood out this past week. Firstly, the assault on the US Capitol by Trump supporters was despicable, unacceptable by any standard, and a sad day in American history. Secondly, President Trump – through a combination of complacency and narcissism – must shoulder a fair amount of the blame for his party losing both Senate seats in Georgia in the run-off election on Tuesday. This could have repercussions for fiscal policy in the US, including ongoing fiscal stimulus (more) and tax policy (higher taxes eventually). And thirdly, the financial markets don’t seem to care one bit about any of this or about the deepening pandemic. After a sell-off on Monday, it was more or less straight up from there as investors continue to “Party Like It’s 1999” (if you remember that song by Prince). Since late December, additional $600 stimulus checks have been sent to Americans’ bank accounts, a BREXIT agreement has been sorted, and the peak of the U.S. political circus has hopefully come and gone. In this context, risk assets performed as might have been expected. Stocks and corporate bonds were better on the week after a dismal start on Monday, even recovering from a poor jobs report on Friday to rally into the close. Economically sensitive assets also point to optimism in the future of the economy. US Treasury bond yields increased (prices fell) and the yield curve steepened. WTI crude oil prices increased above $50/bbl. The US Dollar continued to sell-off as risk sentiment improves, and gold bucked any inflationary concerns and also fell 2.6% on the week, closing at $1,847.75/oz.
The Week Ahead
At this point, investors are fully pricing in future glory days – an improving global economy, the end of COVID-19 and an ongoing abundance of liquidity via unprecedented amounts of government fiscal stimulus and never-ending liquidity from central banks. Traditional investors that rely on solid fundamental analysis and discounted future earnings to value companies just can’t understand. Perhaps the investors driving this upward trajectory in asset prices – especially equities – are more focused on and in tune with the macrotrends likely to drive the post-pandemic world than on earnings, cash flows, or balance sheet strength. Yes, it might be younger and less experienced investors that are an important component, but so be it. If they decide to bid up Tesla or Bitcoin or – you name it – to levels that fell like la-la land, then that’s the market. I mentioned “Party Like It’s 1999” in the preceding section, and the fact is the dot.com runup (1995-2000) ultimately didn’t end so well. However, a lot of things have changed in 20+ years, and it has proven misguided to be a doomsday soothsayer in this market because it keeps going up, even as valuations now well exceed 2000 dot.com levels (S&P 500 P/E ratio 37.4x at end of Dec 2020 vs 29.0x at end of Dec 1999; dot.com bubble burst March 2000). I suppose that time will tell. Digging deeper, underlying trends in equities are likely to favour the continuation of rotation from momentum names (although they didn’t do too badly this past week) to value stocks, expressed by money flowing into cheaper foreign markets (Europe, UK, emerging markets more broadly) and into small/mid caps (Russell 2000). This rotation will likely continue. A steeper yield curve favours banks, and higher oil prices are pushing the shares of energy companies higher. There is not a lot of high impact economic data this coming week, aside from retail, inflation and consumer confidence in the US, and retail, inflation and 4Q20 GDP data (Friday) in the world’s second largest economy, China. Also, Fed Chairman Powell is doing an interview at 12h30 EST on Thursday (14 Jan) at Princeton, and the YouTube link is here.
Data Table, Markets and CV19
**** Follow emorningcoffee on Twitter, and please like and comment on my posts right here on my blog. You need to be a subscriber, so please sign up. Thanks for your support. ****