Economic Highlights
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The COVID-19 vaccinations continue, and economists expect acceleration of economic recovery in second half of the year.
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Real GDP grew 4.0% in Q4 from the previous quarter.
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Retail sales for the 2020 Holiday season jumped 8.3% YoY despite the pandemic.
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Job gains have been limited but expected to improve with more vaccinations and the new stimulus package from Congress.
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Q4 corporate earnings have been broadly beating expectations so far in the reporting season.
Market Highlights
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US Equities started the year in a rally mode but gave up their gains later in January, and S&P 500 Index closed down -1.0%.
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Foreign Developed Markets also dropped -1.1%, but Emerging Markets led all equities, up 3.1%.
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US high-grade bonds added up -0.7%, while the high yield eked out a gain of 0.3%. Foreign bonds were down across the board, with high-grade and high-yield bonds down -0.8% and -0.2%, respectively, but Emerging Markets bonds managed a 0.2% gain.
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Commodities were another bright spot, up 2.6%, helped by another big move in oil, up 7.5%, while gold lost -2.7%.
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US Dollar added 0.7%, rebounding for a recent slide.
Observations and Expectations
2021 jumped out of the gate where 2020 left off, but started showing signs of fatigue towards the end of January. Whether it’s due to high valuations in parts of the market or sell-the-news mentality after the change in the White House, market consolidation seems to be in the works. Consolidations as well as corrections are inevitable and healthy parts of market cycles, we keep reminding readers. The long-term trend remains bullish, but market may be vulnerable in the short term.
Looking forward to February, we continue to watch the earnings reports and the corporate outlook. Some have seemed almost too good to be true, but certain names have been punished just if a company’s growth target for the coming year fell short of investors’ expectations. We’re also watching for the new legislation and policy proposals coming out from the new White House administration and their impact on various industries. Some hopeful expectations have lifted several industries ranging from electric vehicles to cannabis to hefty new highs.
Which brings us back to the point about the short-term market dangers. It’s well known that the last stage of the bull market before pullback – or worse – is euphoria. While that state is hard to define precisely, many signs can remind us of the past market tops such as very high valuations in certain parts of the market, high retail investing activity and many speculative investment opportunities.
The latter is also fueling an unusually strong new issue market, whether traditional IPOs, via direct listing or through a SPAC, the latest market fad. Each cycle, however, brings something new with it. Here are some of the new signs of a market top:
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A bunch of day traders driving up GameStop stock 100 times in a year (and 10-fold in a week)
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A new SPAC run by Colin Kaepernick raising over a billion dollars
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Bitcoin approaching $50,000
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An ETF launching with ticker DUDE
We continue to evaluate opportunities in several promising industries and recovering sectors, while taking profits in some high flyers and hedging overall risk.
Sector Update
Consumer Discretionary are typically the last bastion of defense against economic maladies. It is perhaps no wonder that surging bull market is leaving the sector behind at the moment. It was a crowded trade back in March and April of 2020, and It still provides that nice shelter from the storm that may be brewing on the horizon.
Communication Services sector is the most recent addition to the S&P line-up, broken out of the Technology sector two years ago. And over the past year it was close 3rd in performance, behind only roaring Technology and resurging Consumer Discretionary. In addition to some of the familiar technology giants like Google, Facebook and Netflix, the sector includes telecom providers, media and entertainment companies that are both beneficiaries of the work-from-home economy and stable subscription earnings.
Impact Investing themes are breaking out everywhere in the market. The hopes of Biden administration’s far-reaching green initiatives are driving many previously unknown companies to rich valuations. All alternative energy – not just solar, smart city, electric vehicles, energy storage, and green infrastructure companies are enjoying their time in the sun, sorry for the pun.
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