Monthly Financial Markets Commentary and Performance – January 2021

David vs Goliath

  • GameStop dominated headlines over the last week of January and distracted market participants from key fundamentals.
  • In a sign of our times, encouraged via social media platform Reddit retail investors brought into GameStop, one of the most heavily shorted stocks in the market.  This led to a “short-squeeze”.  As the stock price of GameStop rose, rising by over 1,500% in January, short-sellers had to buy back the stock to cover their loses, pushing the stock price higher.  Loses from the short-squeeze are estimated to have totaled $6 billion at one stage, mainly incurred by hedge funds.
  • A Goldman Sachs’ index of the most heavily shorted stocks rose close to 30% in January, ouch!  This is the index’s best monthly return since 2008, a painful month for short sellers. See graph below.
  • The GameStop short-squeeze is considered one of the largest in US history and resulted in increased market volatility. 
  • Another Goldman Index of the most popular hedge funds stocks fell by over 5% in a week as hedge funds sold stock positions to cover losses on their shorts, double ouch!!
  • The events surrounding GameStop are not expected to derail global equities markets, which are best characterised as at the early stages of a new bull market run.  Pull backs and corrections can be expected along the way.

Economic Fundamentals

  • The GameStop event detracted from developments earlier in the month and improving fundamentals in relation to the fight against the Coronavirus.
  • The US Democratic party took control of the US Senate by the slimmest of margins after winning both seats in the Georgia run-off elections held in early January.  They now control the Presidency, Senate, and House of Representatives.
  • President Biden released his $1.9 trillion (over 8% of the economy) Covid-19 Relief package, this is in addition to the $900 billion of spending approved by Congress in December.  The plan includes $1,400 in additional direct payments to individuals (raising checks to $2000) and aid to small businesses. 
  • Although there are political risks around getting the complete packaged passed, a significant percentage of the package is likely to be passed into law.  This will represent a sizable stimulus for the US economy in the months ahead.
  • The extra spending along with ultra-low interest rates argues well for the global and US economy in 2021 and 2022.
  • Interest rates are likely to remain low for some time.   Many Central Banks, for example the US Federal Reserve and Reserve Bank of Australia, are unlikely to raise interest rates until annual inflation has run above 2% for some time.  This is not expected to occur until late 2024.
  • Over the later part of January, the daily rate of global coronavirus cases and hospitalisations began to decline, particularly in the US, Europe, and Japan.
  • At the same time the global vaccine rollout continues to gather pace, approximately 4.5 million vaccine doses are being administrated daily.
  • In total, more than 100 million vaccine doses had been administrated in 56 countries by early February 2021.  Israel is leading with over 57% of their population vaccinated.  America has vaccinated over 32 million people, 9.6% of their population.  The UK has reached 14% of their population.
  • Goldman Sachs predict: The UK is expected to vaccinate 50% of its population in March, with the US and Canada following in April. The EU, Japan, and Australia reach this 50% threshold in May.
  • Once the vaccine rollout gathers speed the reopening of economies will accelerate around the world.

Economic data

  • Although global economic activity slowed over the last few months of 2020, due to rising covid-19 cases and associated lock down measures, the global economy is on track for a V-shaped recover.  The US and China are leading the way.  Europe is at risk of a double dip recession.
  • The consensus forecast for world economic growth in 2021 is just over 5%, and approximately 4.0% for 2022.  The global economy shrank by around 4.0% in 2020.
  • For the first time in over 10 years, we are likely to see strong and synchronised global economic growth over the years ahead.
  • The Chinese economy rose 6.5% in the last quarter of 2020 from a year earlier.  A strong outcome to finish the year and resulted in the Chinese economy growing 2.5% last year, the only major economy to report positive economic growth for 2020.  Albeit this is the country’s weakest annual economic expansion since the late 1970s.
  • Based on first estimates the US economy grew 4.0% (annualised rate) over the 2020 December Quarter, which is below consensus forecasts and down on the 33.4% annualised rate in the third quarter of last year.
  • The Euro area economy contracted 0.7% over the final three months of 2020, this was a little bit better than expected.
  • Economic activity in New Zealand and Australia is exceeding expectations.  Most notable was the surprise fall in New Zealand’s unemployment to 4.9%, levels not seen since 2017 and much lower than the 5.6% anticipated.  The export and housing sectors drove employment growth.

Market Performance

  • Reflecting the volatility arising from the GameStop short-squeeze the US sharemarket fell 1.0% in January.  In the US smaller sized companies continued to outperform.
  • International sharemarket benchmarks performed a little better than the US market. Markets across Asia performing well, particularly China (+4.8%).  Latin American markets underperformed.
  • Overall, Emerging Markets continued to outperform Developed Markets, EM markets returning over 3.0% in January.
  • The Australian and New Zealand sharemarkets eked out positive returns, +0.3% and 0.1% respectively.
  • Commodities performed well, +4.8%, oil outperformed in January (+7.5%) and the price of Gold fell (-2.5%).
  • By and large fixed income underperformed in January, particularly longer dated securities as interest rates drifted higher.  In New Zealand, the Government Bond Index fell 0.3% and Australia’s -0.7%.

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2 thoughts on “Monthly Financial Markets Commentary and Performance – January 2021

  1. Pingback: Monthly Financial Markets Commentary – November 2020 | Kiwi Investor Blog

  2. Pingback: Monthly Financial Markets Commentary and Performance– December 2020 | Kiwi Investor Blog

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