US and International Equities
The major market indexes ended a second consecutive week in the green with all averages solidly higher. The Russell 2000 Small Cap Index, which has been a bright spot in recent months, continues to lead all US major market averages. Both the MSCI EAFE and Emerging Markets (EM) international markets had positive weeks as well.
The Rise of Emerging Markets
Emerging markets have had quite a start to 2021. The MSCI Emerging Markets (EM) index has returned over 10% for the New Year, doubling the return of the S&P 500 so far year-to-date. LPL Research is positive on the emerging markets. “We expect solid economic growth across Asia to support outperformance by emerging market equities over developed markets in 2021,” noted LPL Financial Chief Market Strategist Ryan Detrick. “Also consider that US-China tensions may ease under the Biden administration and a weaker US dollar may potentially enhance returns.”
Q4 Earnings Tracking Above Prior-Year Levels
As of today, with over 370 of S&P 500 companies having reported fourth quarter results, 80% of the companies reporting have beaten their earnings estimates and earnings growth is tracking to about 3%. In addition, over 75% of companies beat their revenue expectations. This is better than many market strategists expected when earnings season began, when consensus expectations were calling for a double-digit decline.
“Growing earnings in the fourth quarter of 2020 is an impressive achievement by corporate America given that the year-ago quarter took place before the pandemic,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “Wall Street is clearly impressed because consensus estimates for 2021 have been raised substantially as companies have reported results.”
Given these results, LPL Research raised both its 2021 year-end S&P 500 target, to 4,050-4,100 from 3,850-3,900, and its earnings per share forecast for the S&P 500, to $170 from $165.
Energy Continues Fueling 2021 Results
The energy sector, which started its rebound during the fourth quarter of last year and leads all sectors as 2021’s top performer, continued its winning ways returning over 4% this week. The global demand outlook has improved as the COVID-19 vaccine rollout has picked up speed recently and we get closer to a fully reopened economy.
Other major sector winners this week were information technology, financials and health care, each returning at least 1.25% this week. The major detractors were utilities and consumer discretionary, with both sectors down at least 1.5%.
Fixed Income Recap
Bonds, as represented by the Bloomberg Barclays US Aggregate, rebounded this week as the 10-year Treasury yield moved lower. Most other bond sectors also moved in tandem, as investors took advantage of lower prices from last week’s bond selloff. High yield municipal bonds, as represented by the Bloomberg Barclays High Yield Municipal Index, continue to be a bright spot in 2021, returning over 2.7%
Natural Gas and Oil Fuel More Weekly Gains
Commodities posted solid results this week. As mentioned above, oil’s rally continued this week as West Texas Intermediate (WTI) crude oil approached $60 a barrel. In addition, natural gas had another positive week in the green. In addition, silver and gold both reversed course to have a positive week.
US and Global Economic Data Recap
Consumer Prices Climb Modestly
The US Labor Department reported on Wednesday that the Consumer Price Index (CPI) increased 0.3% month to month in January, bringing the 12-month change to 1.4% and matching economists’ expectations. When taking out food and energy prices, core inflation was weaker than expected.
Higher gasoline prices were the largest component of headline inflation in January. This can be attributed to the rebound in energy prices over the past several months. That being said, the overall muted inflation pressures will most likely cause the Federal Reserve to maintain its present policy stance on interest rates for quite some time. For more of LPL Research’s thoughts on inflation, please read our post on Inflation or Reflation? That is the Question.
Steady Progress in Global Growth
The Organization for Economic Co-operation and Development (OECD) leading indicator has risen the past five months, led by Asia, and an indicator of an improving global growth picture in the months ahead. India was the only country to receive an upgrade in January—from stable growth to steady increase. In addition, Canada was the only country to see a downgrade—from steady increase to stabilizing growth.
European Union Cuts Growth Forecast
The European Union (EU) cut its 2021 forecast for euro-area growth from over 4% to under 4%. Officials noted easing of COVID-19 containment measures by midyear is key to achieving the lowered growth target given travel restrictions. Europe may not recover lost economic output resulting from the pandemic until well into 2022.
Small Business Report
The National Federation of Independent Businesses (NFIB) Small Business Optimism Index declined in January, three points below its 47-year average of 98. In addition, those surveyed expecting improved business conditions over the next six months declined to a net negative level not seen since about eight years ago. As noted in the report, many small business owners in certain industries are still impeded by state and local COVID-19 restrictions.
Jobless claims tick higher
Over 790,000 Americans filed for unemployment insurance according to the US Department of Labor. This is above the Bloomberg consensus forecasts which called for 760,000. Moreover, continuing claims also missed estimates, with 4.5 million remaining on unemployment insurance versus the Bloomberg estimate of 4.4 million. The continued volatility in the labor market may embolden Congress to pass a larger stimulus bill.
Next week, the following economic data is slated to be released:
- On Tuesday, we get January retail sales along with last month’s Producer Price Index. In addition, last month’s industrial production will be published.
- Wednesday is all about the February National Association of Home Builders’ (NAHB) Housing Market Index as well as housing starts and building permits.
- Thursday provides investors with another weekly initial unemployment claims report. In addition, the Leading Index will be published.
- On Friday, we get January’s existing home sales along with February’s Markit Purchasing Manager’s Index for both manufacturing and services.
Next week, as we head toward the end Q4 earnings season, we have over 50 companies reporting earnings results and hosting conference calls.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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