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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Weekly Market Performance Snapshot (Week ending January 8, 2021)

  • Dow Jones Industrial Average®:  +1.6%
  • S&P 500® Index:  +1.8%
  • NASDAQ Composite® Index:  +2.4%
  • Russell 2000® Index:  +5.9%
  • 10-year U.S. Treasury note yield:  1.11%
    - Up 19 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Energy, +9.3%
  • Weakest-performing S&P 500 sector this week: Real Estate, -2.6%

    Past performance is not a guarantee of future results.

Equities rise and the rotation toward value stocks continues

Major equity indices achieved remarkable gains in 2020, with the S&P 500 up 18.4% for the year, the NASDAQ Composite up 48.9%, and the Russell 2000 up nearly 20%. The momentum continued into 2021, as these three indices and the Dow Jones Industrial Average all reached new highs in the first week of trading. A big factor: With Georgia’s runoff elections giving Democrats control of the U.S. Senate (to go along with the House and White House), markets anticipate increased government spending providing additional fuel for the U.S. economy.

  • Markets had already been lifted by the $900 billion stimulus bill signed at the end of December. Among other provisions, the December package provides $300/week in extra unemployment benefits, $600 payments to individuals, and additional help to small businesses—all of which should help to cushion the impact of ongoing economic restrictions to contain the coronavirus.
  • When President-elect Biden assumes office on January 20, Democrats should be able to move forward with the more robust stimulus spending measures they supported last year. In addition, Democratic plans to increase spending on infrastructure and green energy projects could give another lift to value stocks, including small caps and industrials.
  • With markets anticipating increased spending and borrowing, the 10-year Treasury yield jumped past the 1% threshold, closing the week at 1.11%. Higher interest rates pushed up bank stocks, which are also benefitting from the Federal Reserve’s December decision to loosen restrictions on dividend increases and stock buybacks.
  • Major oil-producing countries agreed to maintain 2020 supply restrictions through February, while Saudi Arabia announced its intention to unilaterally cut its output starting next month. The moves pushed oil prices and oil stocks higher. Optimism about an eventual return to normalized economic activity is also lifting energy stocks.
  • IHS Markit’s U.S. manufacturing index rose to 57.1 in December, well above the 50 level that signals expansion. The jump from 56.7 in November was the sharpest monthly increase since 2014, suggesting that demand for factory-produced goods has recovered much of the momentum lost during the early part of the pandemic.
  • Minutes from the Federal Reserve’s December meeting made clear that the central bank will continue its bond buying program for the foreseeable future and will provide ample notice of any decision to curtail its purchases. The announcement reassured markets that liquidity will remain adequate for the foreseeable future.

Despite market optimism, potential headwinds exist

Even as equities continued their upward march, the week brought reminders of the challenges the economy will face in the coming months. While markets largely looked past these developments this week, they could create volatility in the future.

  • The jobs report released Friday revealed that the U.S. economy lost 140,000 jobs in December, with the losses concentrated in the leisure and hospitality sector, which includes restaurants. It was the first monthly job loss since April, reflecting strains from recent measures being taken to rein in the virus. It’s unclear how quickly the labor market will resume its previous momentum.
  • The virus itself continues to pose challenges. Hospitalizations are at record highs, a new variant of the virus has been found in many countries (including the U.S.), and vaccine distribution in the U.S. and Europe has not been as smooth as hoped in the first few weeks. Containing the virus will be a major factor in how the economy performs this year.
  • Household spending and income declined in November, suggesting that consumers may be getting squeezed, though household income and savings remain above pre-pandemic levels. The latest (and upcoming) stimulus efforts are designed to boost consumer spending, which accounts for about 70% of U.S. economic activity.
  • It’s unclear how U.S. relations with China will evolve in the coming months. The New York Stock Exchange’s move to de-list three Chinese companies in response to U.S. government mandates was the latest example of how geopolitical tensions could affect investment markets. Furthermore, reports indicated that major Chinese tech companies Alibaba and Tencent could be added to a list of companies Americans are prohibited from investing in. Both companies are widely held by U.S. investment funds, so an investment ban could send ripples through markets.
  • A healthy economy relies in large part on a smoothly functioning government and political system. While markets showed little initial reaction to the tumult surrounding the certification of the Electoral College results on Wednesday, additional political turmoil could put strain on the economy and markets.

Final thoughts for investors

Markets are in an optimistic mood, fueled by hopes for additional fiscal stimulus, reassurance of continued monetary stimulus, and assumptions about successful vaccine distribution. But remember there are real risks in today’s market environment. Consider speaking with a financial professional about how best to position your portfolio to stay on track toward your long-term goals.

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