Despite the rollout of vaccines accelerating across much of the developed world, markets dropped back this week, as the pandemic continues to rage across the globe, leading to tighter lockdowns being implemented in multiple countries. President-elect Joe Biden announced a $1.9 trillion fiscal-stimulus plan that aims to counter the effects of COVID-19. However, there has also been mention of the second stage of the new administration’s plan calling for longer-term spending on infrastructure, green energy and education. This is to be funded, at least partly, by increasing taxes on higher corporations and earners, and although investors expect this, it is being conveyed earlier than markets anticipated.
US equities were down 0.8% over the week, with US technology stocks having fallen 0.7%. European equities are down 0.6%, whilst UK equities have lost 1.9%, with more domestic mid-cap stocks having fallen 2.4%. Australian equities dropped 0.6%, whilst Japan eked out a modest gain, rising 0.1%. Emerging markets in aggregate, however, continued to prosper, rising 1.3%.
US Treasuries over the week were flat, with the 10-year yielding 1.11%, however, intra week, the yield briefly exceeded 1.18% before falling back, as numbers of newly unemployed workers in the US rose last week at its fastest pace since August. German bunds are yielding -0.54% and UK gilts 0.30%.
Crude oil hit its highest level in ten months on Tuesday, with Brent crude trading at $56.75 a barrel. However, as economic lockdowns in the short term tighten, there is an expectation for the recent price strength to weaken, at least in the short term.
Markets are being buoyed by the twin news of stimulus from governments and central banks, and the rollout of vaccines. To date, the news on the effectiveness of the vaccines and the acceleration in rollout programmes is largely encouraging, notwithstanding the continued emergence of new virus strains. Therefore, all things being equal, when lockdowns come to an end, the global economy should experience a significant acceleration, benefiting many of those stocks left behind in the pandemic. However, exactly when a ‘return to normal’ is experienced is an entirely different question.
Inflation is widely expected to bounce back from March onwards. However, investors are then split between those that believe, in the medium term, deflationary pressures will re-exert themselves versus those that believe inflationary pressures will remain.
Those in the deflationary camp point towards ageing populations, indebtedness, and technological change. Whilst those in the inflationary camp point towards massive amounts of monetary and fiscal stimulus, a well-functioning banking sector encourages further credit creation and longer-term structural unemployment, meaning there is less slack in the economies than headline figures suggest. Getting this call right is arguably one of the most important decisions investors have to determine as it could have a significant impact on market pricing.
Economic data being released this week include housing starts, building permits, PMI breakdowns, and existing home sales. US Markets will be closed on Monday in recognition of Martin Luther King Day.