2021 is off to a fast start and the holiday season itself certainly proved to be more eventful than usual. We will bring you up to speed on the happenings, but let’s begin with the latest read on the US labor market. BLS released December’s jobs report this morning showing payrolls declined by 140,000. There are still nearly 11 million Americans unemployed. The official unemployment rate held steady at 6.7% as U6 dipped to 11.7%. The proverbial canary in today’s report was hourly earnings. Earnings jumped 0.8% MoM and 5.1% YoY. Of course, this is also indicative of where hiring is (or isn’t) taking place. Jobs at the low end of the pay spectrum took another hit last month with leisure and hospitality losing 498,000 jobs as the coronavirus cases surged around the world. Today’s figures are not pretty, but it was nice to see that permanent job losses declined by 348,000. We have been saying it for a few months now, but a fiscal response does seem warranted. And on that note…
We did get some stimulus at the end of the year and more is likely to follow. Democrats also picked up two seats in the Senate to start 2021. They are now effectively in control of Congress. While the Senate itself is split 50:50, the current composition leaves Vice President Kamala Harris with the tiebreaking vote. Markets chose to focus on the likelihood of more fiscal spending rather than the uproar on Capitol Hill this week (or the likelihood of larger future tax burdens to offset said spending). Nothing new at the Fed last month, all FOMC members were in favor of maintaining the current pace of bond purchases to support the economic recovery. Fed balance sheet expansion certainly seems to be working its magic. Taking a quick look at investment grade spreads (options adjusted), we note they closed 2020 at 1.03%. Let’s keep in mind that these blew out to as much as 3.05% back in March. Incidentally, the 3% level is where spreads were in the aftermath of the Bear Stearns debacle. No wonder Mr. Powell was quick to step over a few red lines.
Money continued to cascade into the US economy during the final month of 2020. M2 ballooned to an unprecedented $19.2T as we rang in the New Year. We are no longer talking about “B’s”; we are firmly in “T” territory. Since the beginning of the recession, money stock, as measured by M2, has grown by about $3.8T. To put that in perspective, this is more than 2.5X the sum of ALL increases during EACH of the recessions dating back to 1980. Let’s take a quick look at our previous two recessions since the turn of the millennium… From December 2007 through May 2009, M2 jumped by $988B to $8.4T. During the 2001 recession following the dotcom bust, M2 increased by $333B. Of course, for the sake of context there is a certain degree of relativity that we must be aware of, but the point is self-explanatory: this is a lot of money that we are talking about and it’s coming in over a relatively short period of time. Given the size and scope of the current monetary expansion (and the likelihood of its continuation), there are many financial variables that have been influenced (some would say biased) and will continue to be influenced as long as the powers that be continue to pour money into the financial system. Looking at stock indices, buyer beware up here! Markets appear to be pricing in strong earnings results from what was a rather soft end to 2021 on the economic front. New home sales, retail sales, and personal spending certainly missed the mark in December, and we note that earnings expectations did come down at the end of the year. BUT one can never underestimate the power of multiple expansion (these days)!
That said, we are looking forward to the start of earnings season; we will get a clearer read on the shape and trajectory of the “earnings recovery.” It may seem hard to believe with markets at high’s, but earnings have yet to recover from the pandemic. In fact, a full recovery for corporate America may take another couple of quarters at the least. So, in anticipation of a solid (but not great) showing from corporate America and to a certain degree, despite the softer than expected 4th quarter economic data, TWP is moving its S&P 500 fair value estimate up to 3785. 2021 will usher in new market dynamics, but we do expect market volatility to remain elevated relative to historic levels through at least the first quarter of this year. We tend to talk more in terms of “fair values” as opposed to “forecasts.” However, we will throw out a number for yearend 2021: 4450. Much can happen between where we are now and 4450, so we will stay vigilant and look for tactical opportunities to present themselves. Meanwhile, we remain strategically allocated to US equities. Cheers from us and happy New Year!
Market Outlook: Bearish USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- December 2020)