February 2021
US Economy: More stimulus likely.
The US economy expanded at a 4% annualized rate in Q4 2020 but still contracted 3.5% for the year, with renewed COVID restrictions and the expiration of government benefits holding back consumer spending and confidence. A compromise stimulus bill is likely to pass Congress in the coming month to support growth and maintain labor market stability with aid for those who most need it.
US Stocks: Equities cool, Reddit stirs.
US equities took a breather from their recent torrid pace, but some notable exceptions posted eye-popping gains. Retail trading coalesced via social media to drive the prices of a subset of small-cap stocks dramatically higher, including GameStop, which finished January at $325, up from less than $19 at the beginning of the year.
Foreign Stocks: EM equities buck trend.
Equities in foreign developed markets performed in line with US stocks, but emerging markets continued to post strong results. Asia, better positioned for continued recovery post-COVID, led the charge again but the Middle East also performed well alongside a surge in the energy sector and a higher IMF global growth forecast.
Fixed Income: Interest rates creep up.
US interest rates rose again on concerns over higher government spending, debt and inflation following Democrats taking control of the US legislature. Both TIPS and corporate bonds continued to perform well in this environment. Meanwhile, the prospect of direct aid to state and local governments boosted municipal bonds.
Real Assets: Commodity prices hop.
Optimism around economic reopening, weakness in the US dollar and substantial buying of raw materials by China continued to drive robust returns. Oil (+6.3%) was a significant contributor, with anticipated production cuts from Saudi Arabia an additional factor in the strong results.
Alternatives: Hedge funds flat.
The end-of-January upheaval from retail trading might have investors anticipating doom and gloom for the hedge fund industry, but hedge fund indices would suggest those concerns to be overblown. The global hedge fund universe was down about 0.1% for the month, although individual managers caught up in the GameStop saga took billions in losses.
Equities Total Return
| JAN | 3 MOS | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (1.0%) | 14.0% | 17.2% |
| U.S. Small Cap | 5.0% | 35.1% | 30.1% |
| U.S. Growth | (0.4%) | 15.6% | 35.0% |
| U.S. Value | (0.5%) | 17.8% | 4.8% |
| Int’l Developed | (1.1%) | 19.6% | 8.9% |
| Emerging Markets | 3.1% | 20.9% | 27.9% |
Fixed Income Total Return
| JAN | 3 MOS | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (0.7%) | 0.4% | 4.7% |
| TIPS | 0.3% | 2.6% | 9.1% |
| U.S. High Yield | 0.4% | 6.4% | 6.6% |
| Int’l Developed | (1.4%) | 2.5% | 7.0% |
| Emerging Markets | (0.3%) | 4.5% | 7.3% |
| Tax-Exempt | |||
| Intermediate Munis | 0.4% | 1.5% | 3.3% |
| Munis Broad Mkt | 0.7% | 2.9% | 4.1% |
Non-Traditional Assets Total Return
| JAN | 3 MOS | 1 YR | |
|---|---|---|---|
| Commodities | 2.6% | 11.5% | 7.3% |
| REITs | (0.1%) | 11.8% | (6.4%) |
| Infrastructure | (2.1%) | 13.8% | (9.2%) |
| Hedge Funds | |||
| Absolute Return | (0.2%) | 2.0% | 2.5% |
| Overall HF Market | (0.1%) | 5.2% | 6.3% |
| Managed Futures | (0.4%) | 6.4% | 1.8% |
Economic Indicators
| JAN-21 | OCT-20 | JAN-20 | |
|---|---|---|---|
| Equity Volatility | 33.1 | 38.0 | 18.8 |
| Implied Inflation | 2.1% | 1.7% | 1.6% |
| Gold Spot $/OZ | $1848 | $1879 | $1589 |
| Oil ($/BBL) | $56 | $37 | $58 |
| U.S. Dollar Index | 111.9 | 116.2 | 115.3 |
Our Take
We think 2021 will be a year that requires extra levels of vigilance, patience, and preparedness. The retail market fervor over GameStop is the perfect example of an unsettling market development. That said, we don’t think this phenomenon will have a long-term impact on the financial markets or the economy as social media-fueled positions will necessarily unwind, likely in short order, toward fundamental value.
US economic recovery in 2021 will be driven by the ability to control Covid-19 and the efficiency with which we vaccinate the population. To that end, the early efforts to distribute vaccines have proved disjointed. However, vaccine availability continues to improve daily while new cases appear on the decline in many states.
For financial markets, additional fiscal stimulus and accommodative monetary policy are likely to be supportive even if valuations are expensive by many historical measures. With the Democrats now in control of Congress, the level of ongoing fiscal support is likely to be greater although modified due to compromises with Republicans.
We remain concerned over the long-term impacts of deficit spending, the consequences of which are likely to be inflation, rising interest rates, a weaker US dollar and a reduction in future growth. Still, the upcoming changes in fiscal and regulatory policy will provide both obstacles and opportunities for investment portfolios.
What We’re Doing
We continue to recommend maintaining higher equity positions at the expense of fixed income, which offers investors scant yields. Amid the backdrop of continued economic recovery and low interest rates, equities are poised to continue to outpace bonds in the near term.
While we are always looking for relative value opportunities, in 2021 this will likely require investors to be more discerning, with much of the broad equity lift possibly behind us. Real assets (commodities, real estate, infrastructure) are attractive to us on both a near-term and longer-term basis. These positions have lagged equities and fixed income over the last year, leaving them at better relative valuations. Longer term, they should benefit from increasing demand for infrastructure repair and development, political support across party lines, and should inflation get away from us, some natural protection from that shock.
