Market Commentary – January 2021
Stocks were able to weather the storm of events that occurred throughout January, despite investors having numerous reasons to move away from equities. The month began on a somewhat positive note as the availability of COVID vaccines increased throughout the country. Nevertheless, investors were concerned as the number of reported virus cases continued to increase.
Despite numerous challenges, the certification of the 2020 presidential election took place on January 6th. However, protestors sieged the United States Capitol, disrupting the certification process and forcing members of Congress to shelter. Following a restoration of order, Congress ultimately certified the results of the election. On January 13th, the House of Representatives voted to impeach President Donald Trump a second time, charging him with "incitement of insurrection" against the United States government, alleging that he incited the storming of the Capitol. The inauguration of President Joe Biden ultimately took place, as scheduled, on January 20th. The event was held amidst a period of extreme political and civil unrest, concerns over the escalation of COVID-19 cases, increased restrictions in response to the pandemic, increasing unemployment, and curtailed economic recovery.
The fourth-quarter gross domestic product grew at an annualized rate of 4.0%. Job growth stagnated, and the number of those receiving unemployment benefits exceeded 4.7 million. The Federal Reserve continued its accommodative measures and warned that the economy is still reeling from the effects of the pandemic. Stocks ended the month with mixed returns. The large caps of the Dow and the S&P 500 lost value, and the Global Dow fell less than 1.0%. On the other hand, the Nasdaq finished ahead but trailed the small caps of the Russell 2000, which gained 5.0% over its December 2020 closing value. The majority of the market sectors finished ahead, led by energy, which gained nearly 7.0% for the month. Consumer staples and industrials lagged.
|Market/Index*||2020 Close||Prior Month||As of January 31 st||Monthly Change||YTD Change|
|S & P 500||3,756.07||3,756.07||3,714.24||-1.11%||-1.11%|
|Federal Funds||0.00% – 0.25%||0.00% – 0.25%||0.00% – 0.25%||0 bps||0 bps|
|10-yr Treasury||0.91%||0.91%||1.09%||18 bps||18 bps|
*Chart reflects price changes, not total return
Last Month's Economic News
- Employment: Employment reversed course in December as total employment declined by 140,000, well below the total for November, which saw 245,000 new jobs added. In December, the unemployment rate and the number of unemployed persons were unchanged at 6.7% and 10.7 million, respectively. Although both measures are much lower than their April highs, they are nearly twice their pre-pandemic levels in February (3.5% and 5.7 million, respectively). The decline in payroll employment reflects the recent increase in coronavirus (COVID-19) cases and efforts to contain the pandemic. The number of permanent job losses declined by 348,000 to 3.4 million in December but is up by 2.1 million since February. In December, the number of persons not in the labor force who currently want a job, at 7.3 million, was little changed over the month but is 2.3 million higher than in February. In December, 23.7% of employed persons teleworked because of the coronavirus pandemic, up from 21.8% in November. In December, 15.8 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic. This measure is 1.0 million higher than in November. The labor force participation rate and the employment-population ratio were both unchanged over the month, at 61.5% and 57.4%, respectively. These measures are up from their April lows but are lower than in February by 1.8 percentage points and 3.7 percentage points, respectively.
- FOMC/interest rates: The Federal Open Market Committee met in January and scaled back its assessment of the economy and employment from December. Noting that the pace of economic activity and employment has moderated in recent months, the Committee decided to keep the target range for the federal funds rate at 0.00%-0.25%, which it expects to maintain until employment improves and inflation reaches or exceeds 2.0%. In addition, the Committee will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.
- GDP/budget: The gross domestic product advanced at an annual rate of 4.0% in the fourth quarter of 2020. The GDP increased 33.4% in the third quarter after contracting 31.4% in the second quarter. Consumer spending, as measured by personal consumption expenditures, increased 2.5% in the fourth quarter after surging 41.0% in the third quarter. Nonresidential (business) fixed investment climbed 13.8% following a 22.9% increase in the third quarter; residential fixed investment continued to advance, increasing 33.5% in the fourth quarter after soaring 63.0% in the prior quarter. Exports advanced 22.0% in the fourth quarter (59.6% in the third quarter), and imports increased 29.5% in the fourth quarter (93.1% in the third quarter). Federal nondefense government expenditures decreased 8.4% in the fourth quarter following a third-quarter decline of 18.3% in the third quarter as federal stimulus payments and aid lessened. From the fourth quarter of 2019 to the fourth quarter of 2020, the GDP fell 2.5%.
- Inflation/consumer spending: According to the latest Personal Income and Outlays report, both personal income and disposable personal income advanced 0.6% in December after decreasing 1.3% and 1.5%, respectively, in November. Consumer spending fell 0.2% in December after falling 0.7% the previous month. Inflationary pressures remained somewhat muted as consumer prices edged up 0.4% in December after being unchanged in November and October. Consumer prices increased 1.3% in 2020.
- Manufacturing: Industrial production advanced 1.6% in December, with gains of 0.9% for manufacturing, 1.6% for mining, and 6.2% for utilities. The increase for utilities resulted from a rebound in demand for heating after unseasonably warm weather in November. Total industrial production in December was 3.6% lower than it was a year earlier and 3.3% below its pre-pandemic February reading. The index for motor vehicles and parts declined 1.6% in December but was nevertheless 3.6% higher than its year-earlier level. Excluding the motor vehicle sector, factory output moved up 1.1% as most manufacturing industries posted gains. The production of durable goods, other than motor vehicles and parts, rose 1.5%, and nondurable goods production increased 0.9%.
- For the eighth consecutive month, new orders for durable goods increased in December, climbing 0.2% following a 1.2% jump in November. Despite the trend of monthly increases, new orders for manufactured durable goods were 7.0% lower in 2020 than the prior year. Excluding transportation, new orders increased 0.7% in December (0.8% in November). Excluding defense, new orders increased 0.5% in December (1.2% in November). Machinery, also up eight straight months, led the increase, climbing 2.4% in December. New orders for motor vehicles and parts advanced 1.4% in December following a 2.8% jump in November. New orders for capital goods fell 2.5% in December, pulled lower by a 2.0% drop in nondefense capital goods.
- Imports and exports: Both import and export prices rose higher in December. Import prices climbed 0.9% following a 0.2% increase the prior month. The December increase was the largest monthly advance since August. Despite the recent increases, prices for imports decreased 0.3% for 2020. Import fuel prices rose 7.8% in December following a 4.8% increase in November. The December advance in import fuel prices was the largest rise since a 15.2% increase in July 2020. Export prices advanced 1.1% in December after advancing 0.7% in November. The December increase in export prices was the largest single-month price increase since June 2020. Overall, export prices rose 0.2% in 2020.
- International markets: The European Central Bank maintained its record-low policy rate as efforts continue to revive the European economy, still ravaged by the effects of the COVID pandemic. Vaccination delays in Europe coupled with the emergence of a deadlier strain of the virus have kept expectations low for economic recovery any time soon. In Japan, deflation is trending as consumer prices continue to drop. On the other hand, China's fourth-quarter gross domestic product expanded by an annualized rate of 6.5%. Industrial production has benefitted from strong exports, although retail sales in China continue to lag. For January, China's Shanghai Composite Index edged up 1.0%; the Eurozone's Euronext 100 fell 1.3%; and the United Kingdom's FTSE 100 Index dropped nearly 2.0%.
- Consumer confidence: The Conference Board Consumer Confidence Index ® improved in January after falling in December. The index stands at 89.3, up from 87.1 in December. However, the Present Situation Index, based on consumers' assessment of current business and labor market conditions, decreased from December's 87.2 to 84.4 in January. The Expectations Index, based on consumers' short-term outlook for income, business, and labor market conditions, increased from 87.0 in December to 92.5 in January.
Eye on the Year Ahead
February brings with it continued hope in the fight against the COVID-19 pandemic. The economy showed signs of recovery in January, which should continue in February. The stock market is expected to maintain its resilience this month, particularly as more economic stimulus becomes available.
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