Updated: Jan 25
New Year, Same Trends; Our Bullish View on Risk Assets Remains in Place
The amazing record-setting rally that closed out 2020 carried into the beginning of 2021 as the major U.S. equity indices closed at new record highs.
Stocks Start the New Year With a Bang
“Wall Street shrugged off one of the more stressful weeks ever witnessed in Washington D.C. last week on the way to new record highs. The extraordinary assault on our U.S. Capitol didn’t flummox the markets much, although the Volatility Index did spike briefly. But in what was seen as a continuation of the end of 2020, it was the small-caps that outshined the larger-caps by quite a bit and the value names that outpaced the growth names too..”
To many, expectations for another fiscal COVID-relief stimulus package out of Washington seemed to drive sentiment, although there are some that are sounding inflationary bells at the prospects of more stimulus.
Manufacturing on fire = positive for commodities and industrials
In terms of positive economic data this week, the Institute for Supply Management revealed that U.S. manufacturing activity in December rose to its highest level since August 2018.
“Economic activity in the manufacturing sector grew in December, with the overall economy notching an eighth consecutive month of growth” says the Manufacturing ISM Report On Business.
The commodity complex continues to paint a picture of improving economic growth, at least that is what investors are pricing. Commodities are used around the world. Interestingly, the ones that perform the best are those that are tied to improving growth, inflation or both. The Invesco DB Commodity ETF (DBC) is currently outperforming the SPDR S&P 500 ETF (SPY) and there is scope for a commodity super cycle to develop akin to what was seen in the early stages of the new millennium.
US Equities: The trends in momentum continue to favor growth but the theme has broadened within the market cap spectrum. The “rotation” that was a big topic in 4Q was not so much growth to value as it was mega cap to everything else. With this in mind, our bullish equity view remains broad. The best strategy is to be balanced across themes and market caps in the US equity market.
Global Equities: We have been and remain with the stance that there is scope for markets outside the US to outperform the domestic market (US). Asia's economic strength is highly correlated to policy stimulus out of China.
Fixed Income: Fixed Income investors may have become more comfortable with going further out on the risk spectrum in order to generate returns. In particular, the understanding that the Fed “has your back” creates a compelling opportunity in the credits of companies which are rated below investment grade. We are watching this theme closely.
Commodities: The inflation theme is one that we have been on for a while and based on trading in commodity markets, it is one that is playing out nicely. The passing of fiscal stimulus as COVID vaccines become available increases my conviction in this idea. The global commodity strength also paints a picture of improving global economic growth, something that should serve as a tailwind to risk assets in 2021.
Sharp global recovery helped by coronavirus vaccines and stimulus is positive for manufacturing, infrastructure, industrial metals, travel and electric vehicles.