The indices ended the holiday-shortened week mixed with the TSX losing a little ground on the month, finishing the year just up over 6%. The S&P was up 1.43% for the week and the year 16.26%, the Nasdaq added another .65% in the week to finish the year 43.64%. The Russell 2000 lost 1.43% during the week but finished the year gaining 18.49%, and EAFE jumped 2.1% in the week and was up just over 6% for the year. Sector leaders for the year in Canada were Information Technology (83%), Materials (23%), and Consumer Discretionary (18%). In the US, the picture was much the same with Technology up (43%), Communication Services (22%) and Materials (20%). In Europe, Technology and Utilities led (14% and 12% respectively). Losing sectors in Canada were Energy (-26%) and Health Care (-22%), in the US Energy (-33%) and Consumer Discretionary (-21%). In Europe, of the eleven sectors, six finished the year in negative territory with Energy (-34%) and Financials (-15%) leading the pack.
The week’s economic news led with President Trump signing the stimulus package last weekend increasing the direct payments to $2,000 only to have it stalled later in the week by Mitch McConnell, the Senate’s majority leader. Later in the week, McConnell said he would not separate President Trump’s other demands of section 230 repeal and election fraud commission from the plan. The consensus is his plan will fail. In other economic news, pending home sales declined for the third month in a row following the record high in August. Analysts were expecting new and existing home sales to stabilize in November but instead fell 2.6% month-over-month after falling 1.1% in October.
The initial claims for the week ending December 26 released by the Bureau of Labor and Statistics1 were 787,000, decreasing from the previous week’s revised level by 19,000. The continuing claims also dropped by 103,000 to 5,219,000 from the last week of 5,322,000, and the advance seasonally adjusted unemployment rate remained at 3.6%. Indications are for a see-saw recovery as we move into 2021.
After one of the most tumultuous years on record, we head into 2021 with a widely held consensus of the markets and economy. Investors expect the economic recovery to accelerate with time as the number of vaccines administered increases and accommodative central bank policies and fiscal stimulus continue. As the vaccine becomes more available, economic activity is expected to return to more normal conditions later in the year after being restricted to reduce the spread of COVID and reduce the healthcare system’s pressure. COVID-19 will remain with us, but with the vaccine, is expected to become more manageable as global herd immunity is eventually reached. Because vaccines are somewhat controversial, expectations increase that vaccine passports will be required for travel, work, and leisure activities in the future. Vaccine passports could lead to social friction. Enforcement of vaccine passports for various activities could be deemed a civil rights violation mostly because the efficacy of the vaccine remains questionable in the eyes of many, including healthcare workers.2
Central Banks will continue to be accommodative with near-zero interest rates to support the economy for an extended period. Fed Chairman Powell’s past statements of a more relaxed view in the management of inflation targets confirmed lower rates for longer than usual to reduce slack in the economy and labor markets. Asset purchase programs of central banks globally are providing much-needed liquidity and maintaining a lower rate environment. With short rates anchored by Fed policy, longer rates are expected to creep higher as demand picks up, resulting in modest, increasing inflationary pressure. Inflationary pressure could come from the supply side as we transition to the little-understood new economic model supported by Davos’s World Economic Forum.
Fiscal stimulus is needed to support tepid economic activity and bridge the gap to the re-opening of the economy. With re-opening improvement in labor and business creation, replacing many small businesses unable to survive COVID restrictions will become a key driver for sustainable economic growth. As economic diversity improves, so will the breadth of equity markets. Economic diversity will increase equity market strength in what many think is an extension of the previous bull market. In contrast, others believe it is the beginning of a new bull market.
The caveat to our bullish perspective is the global debt levels and political uncertainty. With debt-to-GDP levels close to what was considered near-unsustainable levels, COVID-19 stimulus added to the mountain of debt and obligations. The rapid economic disparity between the haves and have-nots caused by the restrictive COVID-19 shutdowns could result in more political mismanagement. This economic inequality will provide the impetus for the little-understood, rebalanced, re-imaged and restarted “build back better” economic model of Davos mentioned above. Civil unrest is not out of the realm of possibility if leadership missteps.
We remain constructive on the equity markets and alternatives in both equity and debt markets from an asset allocation perspective. While the opportunity to invest in the undervalued European equity market looks appealing, we want to see more evidence of what the “new normal” will look like before we allocate. With Brexit re-shaping the trading relationship between the UK and Europe, there is likely a period of adjustment. We continue to be selective in all markets with a cautious North American bias.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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