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Vantage Point - A Shot in the Arm

Welcome to the last edition of Vantage Point this year. 2020 has been extraordinary of course and, in many ways, a year to forget. We all hope 2021 turns out to be more ‘normal’ but, sadly, we can’t be certain of that just yet. The course of the disease remains the most important determinant of the economic recovery and there have been both positive and negative developments on this front since our last edition. The outlook for 2021 depends crucially on which of these bits of good and bad news dominates. We cover this reassessment and its impact on markets and investment conclusions in our new Vantage Point.

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Weekly Market Roundup

January 25, 2021

Start your week off right with our market snapshot from the Global Economics and Investment Analysis Group.

WHAT HAPPENED

Global stocks were up 1.7%, with gains led by China (+5.9%) and emerging markets (+2.6%), followed by developed markets (+1.5%). In the US, the S&P 500 increased by 2% and the NASDAQ was up by 4.2%.
US sovereign yields and credit spreads were broadly flat (US IG: +1bp, US HY: -2bp).
The US dollar depreciated (-0.6%).
There have been a number of drivers behind the push and pull in the market this week. Heightened fiscal stimulus optimism was a big factor, though US President Biden's $1.9T stimulus plan faces challenges. Vaccine optimism also continues to be flagged as a powerful driver for risky asset prices, as accelerated rollout competes with the still elevated case counts and new virus strains. Better-than-expected earnings was also flagged as a tailwind for risk sentiment. There was a pause in the rotation seen in the market over the past weeks, with leadership coming from growth, rather than value and cyclicals.
Initial Jobless Claims in the U.S. were 900k, down 26k from last week’s downwardly revised 926k claims, and 35k below median expectations.
U.S. manufacturing activity surged to its highest level in more than 13-1/2-years in early January amid strong growth in new orders, but bottlenecks in the supply chain caused by Covid-19 are driving up prices.
Covid-19: China has imposed a lockdown on some 1.7 million residents of the Daxing district. The UK government scientific advisers warned against a rapid relaxation of lockdown measures in the coming months. Several parts of England have now given the first dose of vaccine to more than 70% of the people aged 80 and above.
Economic policy: The BoJ and ECB left monetary policy unchanged, in line with market expectations. The UK government is considering an extension of the furlough scheme, which expires at the end of April, until around mid-year (details will be announced on 3 March).
Euro area consumer confidence declined from the highest of the Covid-recovery at -13.9 to -15.5. The level pre-Covid was -6.6, suggesting confidence is still far off from its prior level.
UK inflation improved from 0.3% y/y (bottom end of historical range) to 0.6% y/y in December. Core inflation gained 0.3% to 1.4% y/y.

WHAT'S AHEAD

German Ifo Business Climate Index (Monday)
UK Average Earnings (Tuesday)
US Conference Board Consumer Confidence (Tuesday)
Fed interest rate decision (Wednesday)
US Q4 GDP (Thursday)
German Q4 GDP (Friday)
Canadian Q4 GDP (Friday)

Monthly Market Roundup

January 2021

Pricing in Continued Recovery

Expectations for a continued economic recovery in 2021 lifted global stocks 4.7% bringing the 2020 gain to 16.8% and trailing two-year performance to 48.7%, the best in history.
US small caps were 8.7%, outperforming large caps by 5% and reflecting the improved domestic growth outlook.v
Decreased safe haven demand led to a 2.1% fall in the USD helping emerging market equities outperform and gain 7.4% MTD.
A resurgence in cases and renewed lockdowns in parts of the world has slowed the economic recovery but the impact is far less than in the spring of 2020.
Ultimately, the global recovery could outperform expectations again in 2021 from pent-up demand, elevated savings, supportive policy, and a successful vaccine rollout.
The Georgia Senate run-off elections gives Biden more room to pursue the Democratic agenda of infrastructure spending, more fiscal support, climate change, and higher taxes.
We expect any tax hike to be outweighed by additional stimulus, remain sanguine on growth, and expect the Q4 rotation from growth into value to persist. For risk-assets, the path of least resistance remains higher.

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December 2020

Global stocks gained 12.4% in November, the best month in history.

Risk on Persists

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November 2020

Global stocks declined for a second month in a row and fell -2.4% in October bringing the YTD loss to -0.7%.

Risk-off Again

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Points of View

What’s priced into markets?

Inflation: Is It Coming Back?

Probably not in a big way, but if it were to it would change the investment landscape completely.

Interest Rates

Short term interest rates reached all-time lows in the US in May, rebounding only marginally since then. At face value, markets appear to be pricing in a significant probability of negative rates in the US. We see this scenario as unlikely.