January delivered something of a mixed bag for investors. In equity markets large developed market stocks were lower, in both the US and abroad, while small caps and emerging market stocks both posted positive returns. What rose was notable because it seems pro-cyclical in nature, as smaller companies and emerging markets tend to benefit from a strong economy. The prospect of a stronger global economy was also evident in bond markets, as yields rose for governments but more or less remained the same for riskier borrowers. It will be interesting to observe the strength and stability of the post-Covid rebound.
As we think about what 2021 might bring there are several emerging themes, the most noteworthy being a return to growth in the global economy. The COVID pandemic brought waves of liquidity and stimulus into the market and the economy. While we believe the combination of vaccines and population-level resistance should allow for a return to normalcy sometime in 2021, hopefully sooner rather than later, we expect the effects of liquidity and stimulus to last for some time longer.
It is worth mentioning some of the highly unusual market activity in certain stocks, most notably those known as “meme stocks” that get discussed on a popular internet thread. That activity may be the topic of a separate blog post, but what’s going on conjures up memories of early 2000. There are a number of reasons why such a comparison is not like to like. A primary reason is that the excitement seems fairly localized to Special Purpose Acquisition Corporations (SPACs), certain Software as a Service (SAAS) companies, and “meme stocks”. Some people seem to be behaving foolishly, but it does not appear to be pervasive. Outside these pockets what is transpiring, on the whole, seems fairly rational.