The S&P 500 Index was down 1% in January based on investors’ revised expectations of corporate revenue growth and earnings. First, the COVID-19 vaccine distribution and inoculation process is proceeding slowly while the virus is mutating. The new strains appear to be slightly more virulent and the vaccination timeline will take longer and delay economic normalization. Second, the peaceful installation of the Biden Administration with impactful policy changes have added uncertainty. New executive orders are being launched daily with an emphasis so far on changing carbon emissions, raising the minimum wage and bringing about social justice. Third, the expectation for further fiscal stimulus in the next 100 days is losing its enthusiasm. The passage of another $1.9 trillion relief package so soon after the recently passed $900-million package seems excessive even for the new Congress.
There is much debate about these spending packages and their effect on the economy. Recently it appears that a misallocation of investment dollars is funding excesses in certain asset classes like bitcoin, solar panel and cannabis companies. The short squeeze on GameStop is an example of retail investor enthusiasm concentrating investments to move individual stock prices. These trades are not illegal, but because of meddlesome congressional influence, they will most likely lead to new rules and limitations on pricing by the SEC.
The Federal Reserve has indicated a willingness to continue its QE (quantitative easing) program of buying mortgage-backed agency and Treasury bonds. The balance sheet has ballooned to over $7 trillion and is likely to continue to grow until employment rises and the economy normalizes. Fed Chairman Jerome Powell emphasized that the economy’s path depends upon the virus and that the pace of economic recovery has moderated recently. The 10-year U.S. Treasury Note still yields only 1.06% and inflation remains dormant. The delay in vaccinations has dampened the enthusiasm for more cyclical industrial, financial and material sector stocks and supported valuations of the stay-at-home growth stocks where earnings will be more consistent this year. Corporate earnings have been better than expected, so the equity market should remain resilient this spring.
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