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The Economy versus the Stock Market: 2020

To people off Wall Street, one seemingly cruel twist of 2020 was the market’s rebound even as the overall economy languished: Nearly 5 million more Americans are unemployed now compared with February, and the end of the U.S. recession that began in February has not been officially determined by the National Bureau of Economic Research, which is tasked with tracking economic cycles.

That’s not altogether unusual, however. Past bull markets, including the prior one that began in March 2009, kicked off while the U.S. economy still was in a recession.

A big takeaway from what happened this year is that market performance is not always tied to economic performance. The market was willing to look at this as a one-time event rather than something fundamentally wrong with the economy.

However, there were some fundamental changes this year that are likely to be long-lasting. For example, many employees may start to fight back on the notion of returning to the office five days a week if they’ve enjoyed working from home.

And the “wholesale change” in how work gets done could affect the pace of economic growth in the future. That’s because of the cumulative effect from small changes (time freed up from commutes and money saved from eating lunches out) to big ones (commercial real estate deals). This shift is going to change things.

Source: Forbes Advisor, Anna-Louise Jackson, Benjamin Curry

Value Stocks Will Outperform

Although some analysts feel the stock market will continue to go up in 2021, that doesn’t mean that all stocks will be winners. For many years in a row, so-called growth stocks like Netflix, Tesla and Amazon have led the market higher. However, some analysts feel that 2021 is the year that value stocks will take over.

Value stocks include most utility, financial, healthcare and energy stocks. Usually, companies like this are slow growers that pay high dividends, but they don’t generally attract the attention that growth stocks can. According to some analysts, this may change in 2021. Instead, three V’s may drive the markets forward. Volatility is expected to decline, a vaccine will accelerate economic recovery, and value and cyclical stocks will outperform.

Source: GoBankingRates, John Csiszar

2021 Market Outlook: International Equities

The global economy and cyclical stocks could have a big comeback in 2021, spurred by the distribution of coronavirus vaccines. Therefore, investors should look outside of the U.S. to take full advantage of the recovery. International markets tend to perform better with a cyclical recovery like the one that is expected in 2021

Tech shares in the U.S. have dominated returns this past year, with the S&P 500 Information Tech Index up more than 35%. That momentum has shifted over the past three months, with financials and industrials taking the lead.

There are other factors that could give international stocks a leg up over U.S. equities. One is their relatively attractive valuations. Whereas some analysts expect 4.1% annualized returns from U.S. stocks because price-to-earnings ratios are historically high, they expect international equities to be able to pick up between 200 and 300 basis points of extra annualized returns from developed and emerging equity markets.

In terms of where, specifically, investors should look, analysts believe the expected outperformance to continue for Europe, Japan and Emerging Markets ex-Asia.

Source: YahooFinance, Julie Hyman

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. The FED has rolled out a number of programs to support the economy, such as buying corporate debt, supporting foreign central banks and municipalities through special facilities and programs.

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.

For investors, that suggests that returns in 2021 will likely come from the coupon income earned on their holdings rather than price appreciation. In fact, long-term bonds could experience price declines if interest rates rise too much.

The expectation is that there not be any major policy changes from the Fed for at least the first half of 2021. Even under an optimistic scenario for the distribution of a vaccine, the economy will take time to rebound to pre-pandemic levels. There is a lot of lost ground to make up. The economy has only recovered about two-thirds of the GDP growth that it lost in the downturn and is still growing at a rate well below its potential.

Sources: Treasury, Freddie Mac, Federal Reserve

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

Consumers Using Credit To Spend – Consumer Credit

Spending at stores essentially stalled in late March and April, as restrictions imposed to confront the spread of COVID-19 took it’s toll on the retail sector. The inability of consumers to spend freely also took a toll on the U.S. economy, since consumer expenditures make up over 70% of GDP. So when consumers were halted from spending, GDP fell an unprecedented amount of over 31% in the 2nd quarter.

The gradual reopening of stores in the 3rd quarter and increased online shopping options gave consumers the chance to regain their spending habits. Unfortunately, many of the same consumers that were spending freely before the pandemic had since lost their job or suffered a blow to their income. Millions of consumers have since resorted to tapping unused credit cards and lines of credit in order to meet ongoing living expenses.

Source: Federal Reserve Bank of St. Louis

Dow Jones	37,815
S&P 500	5,035
Nasdaq	15,657

2 Yr Treasury	5.04%
10 Yr Treasury	4.69%
10 Yr Municipal	2.80%
High Yield	7.99%

Dow Jones	0.34%
S&P 500	5.57%
Nasdaq	4.31%
MSCI-EAFE	1.98%
MSCI-Europe	2.05%
MSCI-Pacific	1.82%
MSCI-Emg Mkt	2.17%

US Agg Bond	0.50%
US Corp Bond	0.56%
US Gov’t Bond	0.48%

Gold	2,297
Silver	26.58
Oil (WTI)	81.13

Dollar / Euro	1.07
Dollar / Pound	1.25
Yen / Dollar	156.66
Canadian /Dollar	0.79

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Currencies:

January 2021