January Review – Slowdown in Growth and Jump in Volatility
- Is January 2021 a continuation of 2020?
- Economic growth is slowing as expected
- Bonds suffer as deficit widens
- Global equities start off on solid footing before volatility wipes out gains
A conclusion to a heated runoff election in Georgia, the swearing in of a new administration, civil unrest, new COVID strains, a disappointing rollout of vaccines, and an unprecedented second impeachment of a U.S. President were just a few of the highlights that kicked off what most were hoping as a brighter new year. However, all the external events did little to disrupt the rally in equities for most of January as investors looked beyond the short-term noise. Economic data confirmed what we expected, that things would get worse before they get better as we continue to deal with a third wave of the coronavirus. Below we highlight the key points for the month for the economy and asset classes.
- Labor market woes. The U.S. economy lost jobs for the first time since April and jobless claims climbed towards 1 million before retreating by month-end.
- Consumer spending slowing. Core retail sales which excludes volatile items like food, gas, autos, and building materials fell for the third consecutive month.
- Confidence slipping: Confidence at both the consumer and business level dipped lower as sentiment was hampered by the third and worst wave of the pandemic.
- Manufacturing; a bright spot: Manufacturing rose to the highest level in nearly three years. Production and new orders are robust while prices paid are rising at the fastest pace since 2018.
- Housing robust: Housing prices are rising at the fastest pace in six years. Existing home sales are near the highest level since 2005 while the months’ supply has dipped to a record low.
- Inflation slowly rising: Inflation is rising but is still below the Fed’s target. The Fed’s preferred inflation measure (PCE core) is rising 1.5% (YoY), below their 2021 target range of 1.7-1.8%.
Fixed Income: Pricing in a rebound. The Bloomberg Barclays U.S. Aggregate Index declined the most in five months as investors grew wary of the massive federal deficit and fears of future inflation.
- Maturity exposure matters: While long term fixed income investments fell the most as interest rates rose, short term Treasuries and floating rate securities rallied in January.
- High yield outperforms: High yield outperformed other corporate bonds as the yield on the Bloomberg High Yield Index fell to a record low.
Global Equities; Mixed Start to 2021.
The MSCI AC World Index fell modestly to start 2021. However, several global indices hit record highs in January. The S&P 500, Russell 2000, NASDAQ Composite and MSCI Emerging Markets Index are a few of the global indices that hit fresh record highs during the month.
- Emerging markets outperform: The MSCI Emerging Market Index rallied for the fourth consecutive month and outperformed both the S&P 500 and MSCI EAFE led by gains in China.
- U.S. off to strong start before retail volatility sets in. All the major U.S. Indices kicked off the new year on a strong note. However, retail speculative trading on select stocks caused fear about market stability and resulted in a broad sell off in the U.S. and volatility saw its biggest monthly jump since Feb. 2020. However, small and mid cap stocks escaped the large cap volatility and posted solid returns for the month.
Commodities rally continues. The Bloomberg Commodity Index rallied for the fourth consecutive month led by grains and energy. Grains benefitted from demand while supply is threated by adverse weather. Energy is getting support from hopes vaccines will accelerate the global recovery.
This material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice.
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By Megan Horneman