The stock market forged ahead last week as Democrats succeeded in passing a new COVID-19 relief package. While the economic news was muted, earnings reports were strong and we expect to see signs of further growth in the weeks ahead.
Figures released on February 5th show that U.S. employers added 49,000 jobs in January, giving a lift to the labor market after a surprising dip in December. The unemployment rate fell to 6.3% in part due to a contraction in the total number of employed workers. That said, we’re still at a deficit of 9.9 million jobs from the February 2020 peak, and adding just 49,000 jobs in a month is, on a relative basis, nothing to be happy about.
Stocks are poised to finish their strongest week since November and the WallStreetBets/social media momentum play, which had held traders in its thrall, has become yesterday’s news. On a total return basis, the Dow Jones Industrial Average was up 1.6% for the year through Thursday, February 4th while the broader S&P 500 index was up 3.2%. The MSCI EAFE index, a measure of developed international stock markets, is up 0.9%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.20%, up from last week’s 1.16% and from 1.12% at the end of 2020. The U.S. bond market has declined 1.0% this year.
The Economy Reclaims Ground
With the Super Bowl just finished, a football metaphor might be apt. Having been pushed into our own backfield, the U.S. economy is now gaining yardage and the goal line of full or near-full employment and accelerating economic growth is within sight.
Though manufacturing slowed a bit in January, it is still expanding. Keep in mind that December’s activity represented a two-year high, so the past month’s pullback was to be expected. The housing market has remained strong, too, with low interest rates bolstering demand for new single-family homes. A report on activity in the service sector of our economy also hit a two-year high in January. Those are all yards gained.
Greater demand for goods and services typically bodes well for the labor force and economy overall. As vaccine distribution continues to improve, companies that have been left out of the rebound are likely to gain ground as well.
We remain wary, though, that traders’ enthusiasm is potentially setting us up for a market correction if there’s a setback in the vaccination rollout, prolonged civil unrest or extended pandemic shutdowns.
We’ll take the positive economic news along with the setbacks but remain mindful of a lesson learned long ago: The economy is not the stock market. The stock market is not the economy. In the final analysis, it’s individual company earnings (growing) and interest rates (low) that drive overall stock market returns.
Speaking of stock market returns, earnings growth for S&P 500 companies has steadily improved in the wake of steep declines last spring. If the trend continues, it could create a tailwind for stocks in 2021. Still, we expect some reversals of fortune as the pandemic eases: Stay-at-home companies that thrived, like Zoom and Peloton, might not sustain their rapid growth. Instead, we may see some rotation into sectors that did not fare as well amid the restrictions. Mask mandates and social distancing are not going away, but if enough people are vaccinated by the summer, depressed demand for travel and entertainment could see a massive reversal.
OUR OUTLOOK
–The prospects for fiscal and monetary stimulus bode well for the health of the economy in 2021
–Bond investors should set lower expectations for returns, but not discount the risk-mitigating characteristics of fixed-income investments in a diversified portfolio
–Pandemic restrictions will continue to influence economic outcomes; once enough people are vaccinated, we could see a surge of pent-up demand driving sales, profits and job growth in suppressed sectors (travel, leisure, restaurants, etc.)
Stay safe, stay warm and be happy.