To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 4.6%; the U.S. Dow Jones Index finishing up 3.9%; and the U.S. S&P 500 finishing up 4.7%.
It is the first week of a new month and, with it, comes the usual big 3 economic releases which I invariably track. Both the ISM Manufacturing and Non-Manufacturing (i.e. “Services”) Indexes came in at 58.7. This reading marked a miss for manufacturing and a positive surprise for services by roughly the same magnitude. Overall, both metrics are at healthy expansionary levels. Meanwhile, after registering a downwardly revised 227,000 job loss for December, the U.S. returned to job growth in January with 49,000 jobs created. However, 49,000 new jobs is an underwhelming result in the grand scheme of things. Yet, it should come as no surprise given the surge in Covid-19 late last year into the first few weeks of 2021. Interestingly, weekly jobless claims declined for the third consecutive week which, unsurprisingly, coincides with three consecutive weeks of sharp declines in new covid cases. The recent decline in both jobless claims and covid cases bodes well for a rebound in hiring in February.
The economic highlights thus addressed, I’d reiterate the message of the past many weeks: vaccination rates are accelerating (in the U.S. – not so much in Canada), while a partial herd immunity may have developed in the more susceptible portions of the population (i.e. those folks who either choose to disregard/minimize distancing and safety protocols, as well as workers in essential industries who may not have the opportunity to work remotely). Outside of a vaccine resistant new covid variant and/or an ultra-contagious variant, I’d suspect the noted trends will only accelerate. The back half of 2021 looks set for strong economic recovery.
The preceding being said, the question arises as to how much of this recovery has been built in to the price of stocks. I suspect a fair amount. I’ve often cited research that suggests stock markets forecast conditions 6 to 9 months down the road. Well, this would be squarely in the second half of 2021. That said, I also suspect that the economic recovery will surprise strongly to the upside. Simply put, there is a staggering amount of pent-up demand that is waiting to be unleashed. I know my family is eagerly looking forward to going to a restaurant and booking a trip as soon as we feel safe doing so. Nearly every other family in our social circle has expressed similar sentiments. I also think the trends in certain technology stocks owned by clients (Amazon, Apple, Google) will continue. The work and shop from home trends will persist well beyond the end of the pandemic, and the enablers of this shift in behavior will benefit. For what it is worth, all three of these companies reported quarterly results the past two weeks which were well ahead of expectations and staggeringly large in their magnitude (for example, Apple reported quarterly revenue of over USD $100 billion!).
Bottom line – the trend in virus containment, coupled with a strong second-half economic expansion, and further buoyed by an ultra-accommodative U.S. Federal Reserve bodes well for equity markets. But volatility (such as that seen last week) will likely persist. I’ll continue to look to add equity (i.e. stock) to client portfolios on bouts of volatility.
That’s it for this week. All the best, and stay safe,
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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