Markets Remained Resilient In 2020 – Equity Overview

Equity markets rebounded in a historical fashion from the lows in March 2020 to the end of the year, driven by vaccine optimism, low rates, and continued stimulus funding.

Margin loan balances increased during the pandemic, eclipsing $722 billion through November and surpassing the previous high of $668 billion in May 2018, as reported by the Financial Industry Regulatory Authority.

Despite headwinds from the pandemic, global equity markets were resilient for the most part, ending the year with favorable returns. Growth and momentum led with the technology and consumer discretionary sectors elevating the most.

The dramatic COVID-linked selloff in March and the subsequent recovery by August were of historical proportion, with unprecedented recaptures across nearly all sectors of the equity markets in 2020. (Sources: FINRA, Bloomberg)

Rates Held Steady Throughout 2020 – Fixed Income Update

Rates remained near historic lows throughout 2020 as ambitious efforts by the Federal Reserve and the Treasury ensured critical liquidity in the fixed income markets.

Key rates fell across the board in 2020, as injected liquidity and active monetary and fiscal policy initiatives contributed to a low rate environment. Mortgage rates fell to new lows in 2020 a dozen times according to Freddie Mac weekly data, triggering a flurry of refinance activity throughout the year.

The U.S. Treasury yield curve steepened towards the end of 2020, an indication to economists that inflation is expected to become more profound. The yield on the 2-year Treasury fell to 0.13% as the yield on the 10-year Treasury rose to 0.93 % in December, pushing short-term yields lower and sending longer term yields higher. Economists and market analysis also view a steepening yield curve as a validation that economic expansion is becoming a more promising possibility.(Sources: Treasury, Freddie Mac, Federal Reserve)

Workers Hesitant To Quit During Pandemic – Worker Confidence

Confidence among workers to freely leave and quit their current job has historically been an indicator of the current condition of the labor market. As COVID-19 took its toll on the economy with layoffs rapidly increasing, remaining workers became less confident in leaving their current jobs in fear that they might not be able to find another position.

The Department of Labor tracks voluntary job exits, also known as quits, which are considered very different from layoffs and work reductions. Less workers quitting also minimizes the chances of wage increases, as employers maintain similar wages for workers not confident enough to quit.(Source: Department of Labor)

Grocery Store Sales Take Off In 2020 – Consumer Behavior

As restrictions surrounding restaurants and dining out set in due to the pandemic, consumers instead headed to grocery stores. Sales at grocery stores surpassed levels never reached over the past ten years. Stores witnessed an immediate surge in customers as news about restaurant closures and dwindling inventories of toilet paper and tissue became major headlines on social media and television.

Various products from toilet paper to frozen foods saw incredible increases in sales as the pandemic set in. Not only did demand for such products increase, but so did prices, thus allowing many food related companies to maintain profitability margins.

Many economists expect the shift to grocery stores by consumers a possible lasting effect, literally changing the way consumers feed themselves. (Source: Federal Reserve Bank of St. Louis)

Ability To Work From Home Tied To Income – Labor Market Update

As stay at home mandates came into effect throughout the country, companies scrambled to migrate their management teams and essential employees to home offices. Data tracked by the Labor Department revealed that higher income positions, which include management and technology jobs, were most likely shifted to home offices. Unfortunately, data also revealed that lower paid employees were the ones that did not have the privilege of transitioning to a home base, since most lower income jobs are found in sectors not supporting home based positions.

Analysts expect that many of the companies that transitioned employees home temporarily may eventually decide to make some of the transitions permanent. The shift in workplace dynamics that occurred in 2020 is considered substantial, producing lasting changes for years to come. (Source: Department of Labor)

Coronavirus Relief Bill Overview

The Coronavirus Relief Bill extends and modifies several provisions first enacted by the CAREs Act in March 2020. The package extends relief through mid-March of 2021, providing support to individuals and small businesses in order to get through the remaining months of the pandemic. Following are highlights from the relief bill:

Stimulus Payment; A one time direct payment in the amount of $600 for individuals earning up to $75,000, heads of household earning up to $112,500, and couples earning up to $150,000. There is also an additional $600 per eligible child dependent.

Extension of Unemployment Insurance Compensation Benefits; Unemployment benefits will be extended for 11 weeks and expire on March 14, 2021.

Paycheck Protection Program (PPP); renewed funding for small businesses providing forgivable loans to first time and second time small business borrowers. Different from the initial PPP provisions, businesses can deduct expenses paid with forgiven PPP loans as well as a simplified forgiveness application for loans up to $150,000.

Business Meal Deductions; Small businesses can now deduct up to 100% of business meal expenses for 2021 & 2022.

Medical Expenses; A ban on surprise medical billings.

Eviction Moratorium; Extended through January 31, 2021. (Source: Tax Foundation)

Consumers Expect Inflation To Rise – Inflationary Pressures

Even though traditional government data has current inflation at 1.2%, consumers have a different perspective with higher inflation expectations. The Federal Reserve Bank of New York tracks and maintains consumer inflation expectations every month, separate from traditional inflation data tracked by the Bureau of Labor Statistics.

The median one-year inflation expectation by consumers is 2.96% as of November 2020, nearly 2 1/2 times what the current inflation rate is. Unlike the traditional prices of goods and services translated into an inflation rate, as represented by the Consumer Price Index (CPI), actual consumer expectations are gathered and measured. Many economists view consumer expectations as a more accurate reading on inflation versus the CPI, since it tends to mimic consumer sentiment rather than a basket of stagnant goods and services.

Recent inflation expectations did rise during the pandemic, as consumers witnessed first hand price increases with groceries and essential items such as toilet paper and hand sanitizers. (Source: Bureau of Labor Statistics)

Homeowner Equity Reaches New Highs – Housing Market Update

Homeowner equity as a percentage of home values reached an all time high in the 2nd quarter of 2020, surpassing the most recent previous highs in 2001. Federal Reserve data revealed that homeowners had achieved over 65.5% equity in their homes, a level not reached since the early 2000’s. Low interest rates have enabled mortgage holders to pay down their mortgage balances rapidly over the past twenty years, concurrently adding to their overall net worth. Homes rank as the single largest asset held by households nationwide.

The high levels of equity has allowed some homeowners to borrow against their homes, enhancing household spending power even during elevated unemployment and lower wages. The concern among many economists and market analysts is the rising level of leverage and the payments required on new home equity lines of credit (HELOC).

(Source: Federal Reserve)

True Unemployment – Labor Market Overview

A closely followed economic statistic by economists and market analysts is the unemployment rate. In fact, the Department of Labor has numerous levels of unemployment rates that it compiles and reports. Of the various rates, the U-3 is known as the traditional or official rate, which came in at 6.9% for its most recent release. The U-3 rate is considered incomplete and inaccurate by many economists and analysts, since it only accounts for people actively seeking employment. Another available level of the unemployment rate is the U-6 rate, which is considered the true rate for unemployment. In addition to those people seeking employment, the U-6 rate also includes part time workers, underemployed workers, and discouraged workers. The U-6 rate is considered a more accurate assessment of the labor market and a true measure of unemployment. The most recent release for the U-6 rate is 12.1%, nearly double of the traditional U-3 rate.

Source: Bureau of Labor Statistics

Online Sales Have Increased During Pandemic – Consumer Behavior

Ever since the internet brought about the ability to shop from home, online sales have been steadily increasing for the past two decades. Thus far this year, online sales have exceeded 14% of total retail sales, more than the 8.6% average over the preceding five years. The growth with online sales this year has been primarily driven by the pandemic, which has forced consumers out of retail stores and onto their computers.

Consumers are expected to resume spending patterns when retailers slowly start to reopen as the pandemic diminishes. Even as consumers return to retail stores, some analysts expect online sales to gradually continue rising. The ease and feasibility of online shopping became commonplace for consumers this year, entrenching many with new shopping habits. (Source: Federal Reserve)
How Lower Credit Limits Affect Your Credit Score Due To The Pandemic – Personal Finance

Millions of Americans are having their credit scores adversely affected by the pandemic, as banks and finance companies modify the extension of credit. As consumers struggle to retain a fragile balance between joblessness, lower wages, and household expenses, lenders are cutting credit limits, lines of credit, and credit card charge limits. The result has been a reduction in scores for millions of Americans even though many continue to manage their credit and payments successfully.

Lenders have been reducing their risk of exposure since March by reducing credit limits on consumer accounts. Since many of these credit accounts carry a balance, the credit utilization ratio rises as a credit limit is reduced. This ratio is a critical component used by the three major credit reporting firms in determining a consumer’s credit score. As ratios rise because of a credit limit reduction, credit scores tend to drop. It is assumed that the higher the ratio, the greater the risk for lenders.

Consumers have been surprised by lower credit scores, since lenders are not obligated to warn customers about a pending credit limit reduction, but only do so after it has been done.

In order to try to curtail the effects of a higher utilization ratio, it is suggested that consumers contact their credit lenders directly and request a reinstatement of their prior credit limit. It is also suggested that simply paying down an existing balance may help in alleviating the threat of a credit score drop. (Sources: Federal Reserve)