January 2021 Stock Market Commentary
Ethan Pollard | February 05 2021
Financial markets were mixed in January as a bout of volatility saw equities turn lower after a strong start to 2021. Much of this volatility can be attributed to the wild swings in GameStop and other heavily shorted stocks as a group of Reddit retail traders took aim at the big banks of Wall Street (for more thoughts on the GameStop / Robinhood situation - watch here).
The benchmark for large cap US stocks (S&P 500) advanced by 3% before a selloff in the final week of trading and brought the monthly return down to -1.0%. Overseas equities fared slightly better, with the MSCI ACWI ex-US index gaining +0.2% and the MSCI Emerging Markets index rallying +3.1% on the month. Bond markets sold off, with the Barclays Aggregate Bond index declining -0.7% in January, as the yield curve steepened alongside rising inflation expectations. Gold prices consolidated, falling -1.3% for the month.
Between the Capitol riots and the GameStop pandemonium, 2021 has not followed the “return to normalcy” script that many had hoped for. For that reason, our firm’s investment process is driven not by the ever-shifting news cycle, but by our data-centric Three Dials framework. Below is a primer on where each of our primary indicators stand through the end of January, all of which were unchanged during the month:
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- Market Sentiment and Momentum: Positive
Despite the late-month wobble, all major equity indexes sit comfortably above their technical support levels. While confidence may be tested and volatility could remain elevated, buying sentiment remains strong enough across the board that our Momentum Dial stays in a “Positive” position.
- Economic Fundamentals: Positive
In its January World Economic Outlook Update, the IMF revised their global growth estimate upward by 0.3 percentage points to 5.5% for 2021. Accommodative fiscal policy in conjunction with a pickup in economic activity due to rising vaccination numbers should drive the continued recovery in the near-term. While slack in the labor market remains a cause for concern, leading economic indicators overall are strong enough that our Fundamental Dial remains “Positive”.
- Valuation: Negative
While corporate earnings for Q4 have come in stronger than expected, price-to-earnings ratios remain elevated compared to historical norms, leaving global stocks exposed to a repricing shock if growth starts to lag. As such, our Valuation Dial remains in a “Negative” position.
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On balance, despite heightened volatility, our Three Dials composite reading continues to take a “Cautiously Optimistic” view, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.
Disclaimer: Our intent in providing this material is purely for informational purposes, as of the date hereof, and may be subject to change without notice. This article does not intend to constitute accounting, legal, tax, or other professional advice. Visitors and readers should not act upon the content or information found here without first seeking appropriate advice from a trusted accountant, financial planner, lawyer or other professional.