Nothing so undermines your financial judgement as the sight of your neighbor getting rich. – J. P. Morgan
January is considered by many to be an important month for stock market returns. The market idiom is that as goes January goes the year. Of course, just because “everyone” knows “that is how things are,” doesn’t mean things go according to schedule. For January 2021 it is no so cut and dry given the market return divergence. The two large cap indexes we track (S&P500 and the Dow Industrials) along with the world and international indexes were all modestly lower for the month. However, the small cap S&P 600 and Midcap S&P 400 were both higher. The aggregate bond index posted a negative return for the month as commodities and the UD Dollar caught a positive bid.
|
U.S. & International Stock Index Returns |
| Total Returns |
| Index January 2021 Year-to-Date |
| Dow Industrials (2.04%) (2.04%) |
| S&P 500 (1.11%) (1.11%) |
| S&P 400 (Midcap) 1.45% 1.45% |
| S&P 600 (Small Cap) 6.24% 6.24% |
| MSCI World (1.05%) (1.05%) |
| MSCI EAFE (1.09%) (1.09%) |
| Bloomberg Agg. Bond (0.72%) |
| CRB Commodity Index 3.82% |
| US Dollar Index 0.97% |
All data as of 02/01/2021, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
The January Effect is the theory that stock market returns in January are better than other months. This is due, in part, to tax loss selling in December that then leads to a return buying stocks in January. (Source) If this is, in fact, how things work, it didn’t really pan out for 2021. Surprising? Not really.
Markets are more complicated than the simple idea that people sell in December and buy in January. With 2020 being a good year for equities and the unease with economic conditions heading into the new year it is not surprising that there were some negative numbers. The economic forecasts for 2021 have been strong, but predicated on continued economic stimulus from both fiscal and monetary policy to support the economy as the population gets vaccinated. In our November 2020 Stock Market Report, we mentioned three issues that could cause the economy to not rebound as expected – vaccine trajectory, the “real” economy, and consumer confidence:
- Vaccine Trajectory: Too early to tell how successful the Biden Administration will ultimately be with their distribution plan; the initial numbers have been positive. According to the Path to Heard Immunity Website the number of daily vaccines given and distributed is above the 1 million benchmark set by the new administration. Given we are a country of more than 330 million people, these numbers will have to grow substantially in the coming weeks/months. The very positive news is a new 1-shot vaccine is heading to the FDA for emergency approval. If approved, we expect to see the daily numbers increase substantially.
- “Real” Economy: Too early to tell if there have been noticeable changes on Main Street. What we can say is that the first quarter of 2021 is not expected to be good. We will continue to monitor business closings and the employment numbers for insights.
- Consumer Confidence: The January print of 89.3 was up 2.2 from the previous month, but down from October 2020. Given the large increase in COVID-19 cases and deaths, this is no surprise. We will know in a few months if the December number was a low point.
Bottom line: There is nothing at this time to make us believe that the economy will be pushed off track.
What About the Stock Market?
If you have been investing in the stock market for more than the past few weeks you inevitably know that the stock market doesn’t go straight up, and isn’t necessarily connected to the underlying economy. The perfect example of this is 2020. After the initial lockdown of the economy in March the stock market cratered, only to bounce back quickly. As the year went on, many of the major stock market indices hit all-time highs. This occurred during the worse year for GDP since 1946.
Magellan Financial does believe that the stock market will do well this year as the economy reopens and starts to resemble what it was pre-COVID. In our Stock Market Outlook 2021 we laid out the case for better equity markets, with emphasis on small company and international stocks. The activity in January bodes well for our thesis as the S&P 400, S&P 600 and MSCI Emerging Market indexes posted positive returns. One month does not make a trend, but we do believe we are at the beginning of a new direction for the markets for three reasons.
Investment dollars flow to profit growth. When the economy grows, earnings are broad-based, not concentrated in a few names or sectors. The big winners in 2020 were a small number of companies that weren’t affected by COVID. Many were in the technology sectors, but others were scattered amongst other market sectors. What they all had in common were earnings at a time when many companies were financially taking a hit.
Inflation is making a comeback. Since the Great Recession (2008) economists and government officials have been doing everything they can to get some inflation back into the economy. The combination of monetary stimulus from the FOMC and fiscal stimulus to counteract the side effects of the pandemic it is likely that 2021 will see inflation hit the FOMCs inflation target of 2%. Currently you can see the effects of higher prices in both the commodities markets and the housing market.
For the stock market investor inflation often provides pricing power for companies.
The weaker US Dollar trend remains intact. For many years the $US Dollar Index stayed within a range of roughly 94 to 98. With the pandemic came a drop lower. When the first stimulus package was announced in April 2020 it spiked above 103. Ever since the trend has been down.
The move from 89.5 up above 91 appears to us to be a normal countertrend rally within a bear market. Put another way, markets don’t move straight up or straight down.
Will There be a Market Correction?
This is an easy question to answer: we believe there will be, unless 2021 is 2017 all over again. Chart #3 shows both the calendar year returns and intra-year declines for the S&P 500 for a 41-year period. Two things stick out: most years have resulted in positive returns, and an average intra-year drop of 14.3%. The year 2017 – with it’s steady rise and no more than a 3% drop from the highs – was the exception, not the rule.
And here’s the thing: many times a pullback happens for no apparent reason beyond more sellers than buyers. Sure, in retrospect, there are reasons (excuses?) given for what happened in the past. In real time, however, it can be hard to find an underlying cause.
This year could be different. That inflation of 2% that we think is going to happen? That could easily spook the market. Turn on the business new networks on any given day and it is likely you find a guest who sees higher inflation coming. They will tell you it’s a good thing. Then a funny thing happens: inflation numbers start to creep up which leads to a fear of greater inflation. What was good is now bad. What was a bull market now looks like a correction.
Final Thoughts
After a very good 2020 for stock market investors, 2021 has started off on a mostly positive note. We believe investors will be happy at the close of the year as well. The two big caveats – the big IFS –are no major setbacks with the return to normalcy from the pandemic, and investors staying the course when the volatility comes. Staying invested can be hard when markets are falling, but necessary. Stock market indexes have always recovered from bear markets, eventually producing new all-time highs. Remember the Great Recession of 2008? The S&P 500 eventually broke through the 1265 highs and has tripled in value.
Bottomline: stick to your investment plan and think of any market correction as an opportunity.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Jeffrey T. Bogert, Partner
Robert I Cahill, Partner Rob.Cahill@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com