Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending January 22, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: +0.6% | +1.3%
- S&P 500® Index: +1.9% | +2.3%
- NASDAQ Composite® Index: +4.2% | +5.1%
- Russell 2000® Index: +2.1% | +9.8%
- 10-year U.S. Treasury note yield: 1.09%
- Unchanged from 1.09% on January 15, 2021
- Up 17 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Communication Services, +6.1%
- Weakest-performing S&P 500 sector this week: Energy, -5.5%
Past performance is not a guarantee of future results.
New presidential administration, same market expectations
Equity markets greeted the inauguration of President Joe Biden on Wednesday with more record highs, as investors anticipated additional fiscal stimulus and new action to accelerate vaccine distribution and fight the coronavirus. The Dow Jones Industrial Average and S&P 500 backtracked a bit late in the week, but all equity indices ended the week higher, with the NASDAQ Composite notching the sharpest weekly gain and closing at another record high. The 10-year Treasury yield held steady.
- Weekly jobless claims were reported at a stubbornly high 900,000, confirming the economy’s struggles. In remarks at her confirmation hearing on Tuesday, Treasury Secretary nominee (and former Federal Reserve Chair) Janet Yellen endorsed President Biden’s $1.9 trillion stimulus package unveiled the previous week: “Without further action, we risk a longer, more painful recession now—and long-term scarring of the economy later.” Yellen’s nomination was approved unanimously by the Senate Finance Committee, but had not been voted on by the full Senate as of market close Friday.
- The future path for the Biden stimulus proposal is up in the air. Democrats now control the 50-50 Senate thanks to Vice President Kamala Harris’s tie-breaking vote, and some budget measures can pass with a simple majority. However, centrist senators on both sides of the aisle have expressed concerns about elements of the Biden plan, so it’s unclear how quickly an agreement can be reached.
- Rising debt may be another source of friction in the stimulus debate. After 2020’s unprecedented spending and economic slowdown, federal debt stands at over 100% of GDP—a post-World War II record. In her testimony on Tuesday, Janet Yellen said, “Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big.”
- While Yellen said the Biden Administration will not pursue tax increases in the immediate future, higher tax rates could be in the offing as the federal government looks for ways to reverse the rising debt trend once the current crisis has passed. Market reaction would depend on the structure, magnitude, and timing of any future tax increase.
- Much of the market’s upward momentum at the start of 2021 has been based on expectations of additional fiscal stimulus, so some (and perhaps much) of the stimulus upside may already be priced into the market. There could be substantial downside risk if a package is delayed or significantly reduced in size and scope.
- Among the first executive orders President Biden signed were several aimed at accelerating the rollout of vaccines and invoking the Defense Production Act to increase the provision of personal protective equipment (PPE). Equity markets may be showing some signs of concern about the slower-than-hoped pace of vaccine distribution amid a lingering economic slowdown.
- Technology stocks—which have become a barometer of the “stay-at-home” trade—have picked up steam. Netflix ended the week 13.5% higher after reporting better-than-expected revenue and subscriber growth, and the S&P 500 Technology sector rose 3.4% for the week.
- Meanwhile, since large banks began reporting earnings on January 15, the S&P 500 Financials sector has fallen 3.6%, despite generally positive earnings news. The movement is a reminder that it’s important to have a diversified portfolio, with exposure to both growth and value across a wide array of sectors.
China’s economy grows and tensions with the U.S. will likely continue
China reported that its economy grew 2.3% in 2020, as a recovery in factory production reignited the country’s export engine. This makes China the world’s only major economy to report year-on-year growth during pandemic-ravaged 2020.
- The Biden Administration will have to contend with a number of ongoing issues in the U.S.-China relationship, including tariffs put in place by the Trump Administration, restrictions around U.S. investment in Chinese companies, supply chain challenges exemplified by global PPE shortages, and questions about the relationship between Chinese tech companies and the Chinese Communist Party and military.
- Flare-ups in the U.S.-China economic relationship should be expected and could have market ramifications.
Final thoughts for investors
With a new administration in Washington, public policy is changing, although certain challenges will remain at the top of the agenda. It’s always difficult to predict how government action will translate into market gains or losses, and public policy is just one of many factors that affect asset values. Rather than reacting to policy changes, speak with a financial professional about how to stay on track toward your long-term goals no matter which way the policy winds blow.