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Equities finished the week slightly off record highs, as investors continue to balance positive news with near-term challenges. In focus is the $1.9 trillion fiscal-stimulus proposal from the Biden administration and worsening coronavirus news, coupled with the vaccine rollout. Republicans have shown resistance to such a sizable stimulus plan, concerned about the long-term sustainability of the government's deficit levels. This week will shed some light on company earnings and fundamentals, with over 23% of the S&P 500 releasing results. Housing continues to remain strong as starts and permits are both on the rise, and although there has been a short-term pullback in mortgage refinancing, demand is still elevated due to persistently low rates.
Equities added to their solid nine-month gains last week, with major indexes reaching fresh all-time highs as Joe Biden was sworn-in as the 46th president of the United States. The recent two-and-half-month stretch from Election Day to the inauguration marks the strongest post-election performance since 1932, with the S&P 500 returning 14%1. For comparison, the second-best election-inauguration gains took place in 1960-1961 when Kennedy assumed power, with the S&P 500 gaining 9%1. The discovery and rollout of effective vaccines have raised hope that restrictions will gradually be lifted, accelerating the economic recovery and return to normalcy. At the same time, the $900 billion fiscal stimulus passed in December and prospects of more fiscal relief under the new administration have added fuel to the stock market rally. We offer the following perspectives on the market's strong performance and our views on what might come next:
1. The new administration's first policy priorities align with two key market drivers for 2021.
We believe that two of the most important drivers of market performance this year will be the pace of vaccinations and size of additional fiscal stimulus. It is not lost on investors, in our view, that the most favorable proposed policy aspects for stocks are front-loaded this year, while the ones that might trigger some indigestion, like corporate tax increases, will likely be postponed until the recovery is on surer footing.
2. The bull market has further room to run.
Rising corporate profits, easy Fed policy, and loose financial conditions are typically a powerful combination for rising equity markets. These conditions have historically occurred in the early- and mid-cycle phases, rather than at the end of a bull market.
3. Elevated expectations could mean that a period of consolidation lies ahead.
The rally has set a high bar for the new administration, and markets have already priced in a healthy improvement in fundamentals, potentially leaving the door open for short-term disappointment. Below are three factors that could dent sentiment in the near term without derailing the recovery, in our view.
We believe the market's winning streak will continue in 2021, but not uninterrupted. A period of consolidation would be healthy and allow the improving earnings and economic fundamentals to catch up with prices. We note that such market corrections are common even during the early stages of the market cycle. Given our positive outlook for economic growth and earnings, we would view any upcoming pullbacks as attractive buying opportunities for investors with a long-time horizon.
Angelo Kourkafas, CFA
Sources: 1. Morningstar Direct, 2. Bloomberg, 3. FactSet
|Dow Jones Industrial Average||30,997||0.6%||0.7%|
|S&P 500 Index||3,841||1.9%||2.3%|
|10-yr Treasury Yield||1.08%||0.0%||0.2%|
Source: Factset, 1/22/2021. *4-day performance ending on Thursday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
The Week Ahead
Important economic data coming out this week includes personal income and consumption growth as well as inflation breakdowns.
The Weekly Market Update is published every Friday, after market close.
This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.
Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.
Past performance does not guarantee future results.
Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.
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