US and International Equities
The major market indexes finished the week higher. The tech-heavy NASDAQ had a solid week returning over 4%. In addition, many international markets followed in lockstep with their US counterparts. Emerging markets stocks (MSCI EM Index) handily outperformed developed international markets (MSCI EAFE Index) by almost 2 percentage points.
Emerging Markets Emerge
Even with the emerging market’s (EM) strong performance this week, LPL Research believes these investments have more upside potential.
- The forward Price Earnings ratio (PE) for emerging markets is more than 25% below that of US stocks, which LPL Research considers attractive (source: FactSet).
- Solid EM earnings growth over the past year has kept EM valuations low despite matching the S&P 500 performance in 2020 and outperforming by 5 percentage points year to date.
“We expect solid economic growth across Asia to support continued outperformance by emerging market equities in 2021,” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “China was the only major economy in the world that grew in 2020 and US-China tensions may calm some under a Biden administration.”
US vs. Developed Equity Valuations
The US stock valuation premium over developed international equities remains substantial.
- Developed international stocks are trading at a more than 20% discount to US stocks on a forward price-to-earnings (PE) basis, compared with a 25-year average discount of 4% (source: FactSet).
- Europe’s valuations are more than 30% above long-term (25-year) averages.
- Japan’s forward PE ratio remains 15% below its long-term average and at levels LPL Research considers attractive.
Tech Trounces the Pack
Communication services and technology had banner weeks, with each sector returning over 4%. Energy and financials lagged this week, with each losing over 1%. The energy sector is still the best performing sector year-to-date, returning almost 10%.
Fixed Income, Currencies, and Commodities
Bonds, as represented by the Bloomberg Barclays US Aggregate, experienced modest pullback this week, whereas the 10-year Treasury traded a fraction higher. Moreover, most bond sectors traded mixed this week.
Bond outlook update
The extra yield that investors demand for investment-grade (IG) corporates over similarly dated Treasuries was at 1% as of Friday, January 15. This is near the tightest level of the last economic cycle—0.91% in February 2018—indicating strengthening economic confidence but increasingly expensive valuations. We still see an incremental advantage in investment grade corporates over Treasuries, but we still continue to emphasize mortgage-backed securities (MBS) for their lower interest-rate sensitivity. For more on credit spreads and our bond outlook, please read the LPL Research blog titled Credit Spreads Limit Bond Performance Outlook.
Commodities across the board were mostly higher this week. Oil’s rally from last year’s fourth quarter has continued during 2021. WTI crude pulled back a fraction this week and finished the week above $50 amid reports of Iran ramping up production. In addition, natural gas had a tough week, selling off over 10%. Gold and silver reversed their two-week pullbacks to finish this week solidly higher.
US Economic Data Recap
Treasury Secretary nominee Janet Yellen urged Congress to “act big” on the next COVID-19 relief package after President Biden outlined his $1.9 trillion stimulus proposal as part of a domestic policy agenda geared toward overcoming the COVID-19 health crisis. Yellen noted that the long-term fiscal trajectory is a concern; however, given the short-term challenges with COVID-19, strong fiscal stimulus measures are needed.
Jobless Claims Surpass Estimates
The United States Department of Labor reported 900,000 claims for unemployment insurance last week. This came in ahead of the Bloomberg consensus estimates of over 930,000. In addition, continuing claims fell over 120,000 to 5.1 million. Elevated jobless claims show that state and local restrictions are still holding back the jobs recovery, despite improving COVID-19 data.
Low Mortgage Rates Incentivize the Recent Housing Boom
The national average 30-year fixed mortgage rate continues to decline, falling below 3% as the housing market remains one of the hottest areas of the economy. For more of our thoughts on housing and rates, please read the LPL Research Blog titled Mortgage Rates Continue to Fall as the Housing Market Booms.
Next week, the following economic data is slated to be released:
- On Tuesday, we get the November Federal Housing Finance Agency (FHFA) Home Price Index, January’s Consumer Confidence, and the November S&P/Case-Shiller composite home price index.
- Wednesday is all about December durable orders. In addition, the Federal Reserve (Fed) Federal Open Market Committee (FOMC) is slated to meet, which will watched closely by market participants.
- Thursday provides investors another weekly initial unemployment claims report and fourth quarter GDP. In addition, December’s building permits, last month’s wholesale inventories, new home sales, and leading indicators will be published.
- On Friday, we get last month’s personal consumption expenditures along with personal income. In addition, data on December pending home sales along with the Michigan Sentiment will be announced.
- We will also get into the heart of Q4 earnings season next week with approximately 120 companies reporting earnings 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.
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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U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
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This Research material was prepared by LPL Financial LLC.
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