Keeping focused on your long-term goals

Market Commentary  | Week ending January 15, 2021

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

Weekly Market Performance Snapshot (Week ending January 15, 2021 and Year-to-Date)

  • Dow Jones Industrial Average®:  -0.9% | +0.7%
  • S&P 500® Index:  -1.5% | +0.3%
  • NASDAQ Composite® Index:  -1.5% | +0.9%
  • Russell 2000® Index:  +1.5% | +7.5%
  • 10-year U.S. Treasury note yield:  1.09%
    - Down 2 basis points from 1.11% on January 8, 2021
    - Up 17 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Energy, +3.1%
  • Weakest-performing S&P 500 sector this week: Communication Services, -3.6%

    Past performance is not a guarantee of future results.

Markets look to Washington for stimulus plans

Most major equity indices fell for the week, as negative economic data served as a reminder that the pandemic is still taking a toll on the economy, even as optimism about 2021 growth prospects remains high. Financial markets showed little reaction to the second impeachment of President Trump, instead looking ahead to President-elect Biden’s inauguration and the prospects of further fiscal stimulus.

  • On Thursday evening, Biden unveiled his proposal for the next round of federal fiscal stimulus. The $1.9 trillion package would include $1,400 direct payments to Americans (on top of the $600 payments approved in December), increases in unemployment benefits, extra spending on vaccine distribution, help for schools and state and local governments, and more.
  • While Democrats will control both houses of Congress following the inauguration of Vice President-elect Kamala Harris, the party’s margin in the Senate will be narrow, with Harris casting tie-breaking votes in the 50-50 chamber. As a result, a handful of centrist senators in both parties may have increased leverage over what ultimately becomes legislation.
  • The upshot is that stimulus provisions that have more bipartisan support, such as direct payments to individuals and funding for vaccine distribution, may move more quickly through Congress, while more contentious priorities, such as aid to state and local governments, may encounter resistance.
  • The case for additional fiscal support was bolstered by two economic reports released during the week. The Commerce Department reported that U.S. retail sales fell 0.7% in December, the third straight monthly decline.

In addition, the latest weekly reading on initial unemployment claims jumped to 965,000. Taken together, the data showed that the virus continues to weigh on the economy.

  • The Senate is expected to conduct an impeachment trial after inauguration day. The main implication for markets will be whether the trial impedes progress on stimulus and other economic priorities.
  • In other policy-related news, reports indicate that the U.S. government will not prohibit Americans from investing in Chinese tech firms Alibaba and Tencent, as had been speculated. Both companies are widely held by many U.S. funds, so a race to divest could have been impactful. The stock prices of both firms rose more than 3% on the news.
  • The U.S. government announced that it would make more doses of the Moderna and Pfizer vaccines available, while broadening its recommendations about who should be eligible for the vaccine right now (states make the final determinations). Separately, Johnson & Johnson announced promising results for its single-dose coronavirus vaccine candidate. Markets viewed both vaccine developments positively.

Consider how interest rates and inflation could affect your portfolio

Markets are currently caught between near-term economic concerns fueled by the virus, and anticipation of longer-term economic growth and potential inflation made possible by vaccines and fiscal and monetary stimulus. Working with a financial advisor, investors should give serious thought to portfolio positioning moving forward. Specifically: Is your portfolio prepared for both ongoing economic turbulence and the higher interest rates and potentially higher inflation that could result from an economic recovery?

  • In the first two weeks of the year, the 10-year Treasury yield moved above 1.1%. Investors have also shown renewed interest in sectors such as financials and energy, which would benefit from a return to more normal economic activity. However, it’s still to be determined whether this market action will prove sustainable. Indeed, the 10-year Treasury yield dipped back below 1.1% after the latest disappointing jobs and retail sales data.
  • Still, longer-term interest rates have risen nearly 0.2% in 2021. Remember that rising interest rates can be challenging for bonds more broadly. The return on the Bloomberg Barclay’s U.S. Aggregate Bond Index® (a widely used bond price benchmark) is -0.8% so far in 2021.
  • The rise in interest rates has led financial stocks, a sector that represents about 13% of the S&P 500, to return 4.7% in two weeks.
  • Banks began reporting quarterly earnings on Friday. JPMorgan Chase, Wells Fargo, and Citi delivered better-than-expected earnings, though their share prices fell after the reports. All three banks were able to set aside less for expected loan defaults, as consumer finances have held up better than anticipated thanks to government aid throughout the year.
  • Inflation clocked in at 1.4% for 2020. In a speech Thursday, Federal Reserve Chairman Jay Powell reiterated that the Fed is prepared to combat inflation when it appears, but doesn’t see a need for action yet: “When the time comes to raise interest rates, we’ll certainly do that—and that time, by the way, is no time soon.”
  • Market anticipation of additional stimulus revealed itself in the strong performance of value stocks. Sectors such as energy and financials, which struggled throughout 2020, have led the Russell 1000® Value Index to outperform the Russell 1000® Growth Index by 3.9% this month.
  • Commodities, such as oil, copper, and corn, have shown strong price appreciation. If the virus is contained, economic growth takes off, and inflation rears its head, commodities may be well positioned to participate. In the last ten years, the Bloomberg Commodities Index has only posted positive returns in three calendar years. The market may be approaching a point where commodities may provide both potential returns and an inflation hedge.

Final thoughts for investors

Given the uncertainties around interest rates and inflation, it’s important to have a portfolio diversified both across and within asset classes. Because of the appreciation of growth stocks last year, some investors may currently find themselves too heavily weighted toward growth stocks. Speak with a financial professional about your 1-2 year investing horizon and consider whether your portfolio needs any adjustment to weather multiple market environments.