The S&P 500 index continued its upward momentum in the first few weeks of 2021 and hit a new record high late last week. We are cautiously bullish as the combination of the introduction of COVID19 vaccinations, expectations for additional fiscal stimulus and a recovering economy can continue to fuel profits. From our point of view, however, international tensions and uncertainty about the expected tax legislation can become headwinds for the stock market.
The steadily rising interest rates resulted in long-term government bonds entering a downward trend from August 2020. This downward trend continued in January 2021 (Figure 2).
While large-cap tech and other growth investments have drawn the most attention in recent months, it’s worth pointing out that value stocks outperformed the large-cap S&P 500 index (Figure 3). We believe this is mainly due to money coming from declining bond investments. Dividend-paying stocks are essentially replacing traditional income-oriented pension funds.
Small caps have also outperformed large caps since the lows of the COVID19-related market panic in March 2020 (Chart 4). With smaller cap companies harder hit by the pandemic, a rebounding post-Covid economy makes small-cap stocks more attractive as a group.
We see the bearish trend for the US dollar continue against the basket of major currencies, but the weakness will likely depend on the size and frequency of fiscal stimulus and changes in monetary policy.
Partly due to the weakening dollar and partly due to the consolidating global economy, natural resources are on an upward trend. I would like to highlight the West Texas Intermediate Crude (WTIC) benchmark here. WTIC moved in a wide range of trade between August and November last year, but rose steadily after the first positive news about the COVID19 vaccines became available (Figure 5). We wouldn’t be surprised if natural resources did well in 2021.
International markets are also performing well right now, with emerging markets leading the way (Figure 7) as Southeast Asian economies appear to be recovering from the pandemic faster than the US and Latin American economies are benefiting from the natural resource boom.
European markets are starting to lag behind the S&P 500 index (Figure 8), likely due to a slower pace of vaccination and the short-term economic disruption from BREXIT. A notable exception is southern European countries like Italy and Greece, which will benefit from increased tourism after the cover.
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