New Year, Same Story
The unrelenting upward march of the stock market that we became so accustomed to during the second half of 2020 continued into 2021, with the S&P 500, Dow Jones Industrial Average, NASDAQ, and Russell 2000 all setting record highs last week. Much of the narrative remains unchanged. Continued government stimulus and the expectation for improving and sustainable economic activity as the vaccine roll-out continues has market participants in a buoyant mood.
While the future economic outlook may look brighter, the current picture is becoming increasingly bleak. The monthly U.S labour market report recorded a jobs decline for the first time since the loss of over 20 million jobs in March/April 2020 as many regions continue to grapple with the rising virus numbers.
Fresh from the success of Q4 2020, which saw the Russell 2000 jump 31%, the small-cap recovery continued this week as the Russell 2000 Index jumped 6% — eclipsing the 1.9% and 2.5% recorded by the S&P 500 and NASDAQ composite index, respectively.
The U.S 10 Year Treasury yield finally ventured back above 1.00% this week, for the first time since March 2020. The risk-off sentiment in markets is likely to result in continued steeping of the yield curve provided the vaccine roll-out is successful.
The slip continues for the U.S. Dollar. Vaccine progress and the imminent fiscal boost from a new U.S. government continue to push investors away from the greenback towards riskier assets.
After nearly quadrupling in price in 2020, bitcoin blew past the $30,000 and $40,000 mark during last week’s surge. This latest rush has again created Bitcoin hysteria. While bitcoin’s potential to establish itself as a constant and noteworthy asset class is becoming more apparent, Sunday’s 20% drop in price to $33,000 functions as a reminder that the now infamous crypto is still very much a speculative asset.
Investors may need to dial back heightened return expectations for the year ahead. While much of the outlook for equities is positive, a repeat of the returns experienced in 2019 (31.5%) and 2020 (18.4%) is unlikely.
The S&P 500 has rallied 72.4% since the start of the bull market on March 23rd, 2020. With much of the positive factors already priced into markets, each incremental move higher will become increasingly difficult to justify.