January 15, 2021
US and International Equities
The major market indexes finished the week lower. In addition, many international markets followed in lockstep with their US counterparts. Emerging markets (MSCI EM Index) outperformed developed international markets (MSCI EAFE Index).
For the second week in a row, energy was a standout performer among its sector peers, while communication services, information technology, and consumer staples were among the laggards this week.
Energy Leading the Pack
Building on its impressive start to the New Year last week, energy continued higher, returning almost 4% this week. This puts energy’s year-to-date performance above 13%. As discussed below, even as WTI crude gave up some ground this week, crude is still above $50 a barrel, improving the economic conditions of many business involved with the energy patch.
Small Caps Prevail
Last week, small caps outperformed all broad market indexes, continuing their run from the fourth quarter of last year. In the midst of this week’s major market pullback, small caps bucked the trend to continue higher. As of Thursday, January 14, 2021, the Russell 2000 Index has returned just over 33% for the past three months.
Fixed Income, Currencies, and Commodities
Bonds, as represented by the Bloomberg Barclays US Aggregate, recognized some modest demand during the second full week of 2021, as did the 10-year Treasury. Moreover, most bond sectors traded mixed this week.
Commodities across the board were mostly lower. Oil’s rally from the fourth quarter last year has stalled some during 2021. WTI crude pulled back this week but still finished the week above $50 where it has become more profitable for many producers. In addition, natural gas enjoyed a solid week while gold and silver were in the red for the second week in a row.
US Economic Data Recap
Retail Sales Slump
Retail sales in the United States declined 0.7% month over month in December, below all but two of the 70 forecasts in Bloomberg’s consensus survey (US Census Bureau). The weak retail sales data reveals the effects of increasing restrictions in Q4 2020 to curb the spread of COVID-19.
Jobless Claims Were Higher Than Expected Last Week
According to the US Department of Labor, 960,000 new claims were reported for unemployment insurance last week. This came in ahead of the Bloomberg consensus forecasts for under 770,000 claims. In addition, continuing claims came in higher than expected, with over 5.2 million unemployed continuing to file versus the Bloomberg estimates of 5 million. The jump in claims was ahead of the forecast range of all 44 economists surveyed and signals continuing pressure on the labor market amid rising COVID-19 cases along with government actions to control the spread of the virus.
“The spike in cases is starting to impact the economy, as retail sales surprisingly dropped and initial jobless claims spiked to levels last seen in the summer,” explained LPL Financial Chief Investment Officer Burt White. “Although we expect this economic soft patch to be short-lived, it is another reminder of why another round of stimulus to help those impacted by the virus is so important.”
Small Business Optimism Wanes
The December release of the NFIB Small Business Optimism Index dropped to a 6-month low and below the long term average since 1973. Holiday-season growth in COVID-19 cases and political uncertainty pressured small business sentiment. For more of our thoughts, please read the LPL Research blog titled Small Business Optimism Falls to Recovery Low.
Consumer Prices In Line With Expectations
Consumer inflation for December, based on the Consumer Price Index (CPI), grew 0.4% month over month, which was buoyed by higher gasoline prices. Core inflation, which excludes both food and energy prices, grew 0.1% month over month. December’s core inflation growth was at a slower pace in comparison to November. With core inflation growing at an annual rate of 1.6%, we would not expect inflation to become a concern for the financial markets.
Next week, the following economic data is slated to be released:
- Wednesday is all about the National Association of Home Builders (NAHB) January Housing Market Index.
- Thursday provides investors another weekly initial unemployment claims report. Moreover, we also receive data on December housing starts and building permits.
- On Friday, we receive preliminary data on January Purchasing Manager’s Index (PMI) from Markit along with December’s existing home sales.
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References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All market and index data comes from FactSet and MarketWatch.
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