January Market Recap
February 1, 2021
If you are among the investors who believe January performance helps to forecast what will happen in the year ahead, well, your crystal ball remains a little murky after the first month of 2021.
The Dow Jones Industrial Average and S&P 500 both finished lower in January, but the tech-heavy NASDAQ managed to stay positive. International equities produced similarly mixed returns. Emerging Markets gained 3.2% last month while Non-US Developed equities lost 0.8%. Large cap stocks were generally down. Small caps stocks were mostly up.
The mixed results feel appropriate if you acknowledge all the variables this market is trying to make sense of: The new balance of political power in Washington. Encouraging vaccine data but historically high new cases of COVID. Massive liquidity still filtering its way through the financial system. And most recently, the short-squeezing saga of Reddit users high on GameStop shares targeting hedge funds in a high-profile Main Street vs Wall Street battle.
Just four of the 11 sectors in the S&P 500 delivered profits in January. Only two of those, Energy (+3.8%) and Health Care (+1.4%) booked gains of at least 1%. Consumer Staples (-5.2%) and Industrials (-4.3%) were the worst-performing categories.
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Believe it or not, it was less than a month ago that the balance of American political power was still up for grabs. Two runoff elections in Georgia on January 5 produced victories for Raphael Warnock and Jon Ossoff, an unexpected outcome that gave Democrats control of the US Senate, along with the House of Representatives.
The day after, January 6, brought a riot and storming of the US Capitol that resulted in five people dead. One week later, the House impeached Donald Trump for “incitement of insurrection,” effectively scheduling a strange final episode to Trump’s most unusual presidency. On January 20, Joe Biden was sworn in as the country’s 46th President.
It was, by any standard, an incredibly bizarre series of events and yet the stock market behaved as though the political theater was performing a mere dress rehearsal. The S&P 500 rose 4% between January 4 (the night before the runoff elections) and January 20 (the date of Biden’s inauguration).
To be honest, we view the political circus more as a distraction than a meaningful driver of market movements, so it was a pleasant surprise to see all three major US stock indices trading near all-time highs on January 25. What happened next was truly unpredictable.
The Dow, S&P 500, and NASDAQ all fell more than 3% in the final week of January, triggered in part by the high-profile short-squeeze involving GameStop and other stocks coordinated by a pool of investors on Reddit message boards. Although the extreme volatility was concentrated in only a handful of stocks (Blackberry, AMC Entertainment, Bed Bath & Beyond, and American Airlines among them) concerns of market manipulation created unease and no doubt increased the selling pressure.
Our view is that the GameStop story is unlikely to have any lasting consequences for long-term investors. Hedge funds will certainly be more mindful of disclosing their short positions, but major regulatory changes are not in the cards. If anything, it’s more reason to stick with traditional (long-only) investments and custody assets with large broker-dealers, rather than discount trading platforms that restricted market access to some clients.
Buried in the drama of the GameStop headlines, another quarter of corporate earnings were being reported in late January. And yet again, real earnings are beating consensus expectations. With 37% of companies reporting, the S&P 500 is on pace for a blended earnings decline of 2.3%, according to FactSet data research. Consider that as of year-end, projections called for a cumulative decline of 9.3%, year-over-year.
Small-cap stocks, as mentioned earlier, continued their relative outperformance. The Russell 2000 increased 5% last month. That’s after climbing more than 30% in the final three months of 2020, the best quarter for small-caps in more than 40 years.
Emerging Markets were the other noticeable outperformer in January, thanks to positive data out of China. The Chinese government reported accelerated economic growth in the fourth quarter and annual growth of 2.3% last year. That makes China the world’s only major economy (so far) to have grown, rather than contracted in a pandemic-riddled 2020.
Vaccine developments remain a silver lining in what is still a steep hill to climb in the world’s battle against COVID-19. A single-dose vaccine developed by Johnson & Johnson is expected to soon earn approval from the US Food and Drug Administration (FDA), which would add to the supply of vaccines available for distribution.
The first piece of legislation introduced by the Biden administration was a proposed $1.9 trillion stimulus package that includes another round of direct payments to Americans, plus more money for COVID-19 testing and vaccine distribution. It would be the third major round of stimulus from the US government. The first (CARES Act) was passed in late March 2020. The second was agreed to in late December. Republicans have so far preferred a more modest aid package, but the Democrats likely have the votes to pass Biden’s plan even without Republican support.
10-year Treasury yields rose above 1% in January for the first time in 10 months. The number climbed as high as 1.19% on January 12 before finishing the month at 1.09%.
Oil continued to grind higher, boosting Energy stocks along the way. West Texas Intermediate Crude increased an additional 7.6% in January and closed the month trading at $52.20 per barrel. Oil prices have shot 46% higher in the last three months combined. Gold prices drifted lower, falling 3.2%.
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Stock investing involves market risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. International and emerging market investing involves special risks such as currency fluctuation and political instability. These risks are often heightened for investments in emerging markets. No strategy assures success or protects against loss. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
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