January 2021 Market Commentary: YOTO! (“You Only Trade Once”)
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January 2021 Highlights:
- Following a strong finish to round out 2020, global equity markets continued their sharp advance throughout most of January as post-pandemic reflationary optimism pervaded investor risk appetite, onnly to pull back sharply at the end of January due to ‘technical’ selling pressures brought on by trade battles between institutional hedge funds and retail investors.
- Looking beyond the daily headlines dominated by media accounts of retail traders trying to squeeze out institutional hedge funds from their ‘short’ positions, market sentiment turned downbeat as COVID-19 variants continued to spread, even reaching parts of North America. One ongoing concern is that vaccination efforts will not be able to keep up with virus mutations, prolonging the ‘social distancing’ measures that have locked down normal economic activity.
- After having advanced just over 3% through the third week of January, global stocks (MSCI All-Country World Index) finished down 0.5% for the month. Once again, MSCI Emerging Markets (primarily pan-Asian markets) and MSCI Pacific ex Japan led major regions returning 3.5% and 3.1% for the month followed by MSCI Japan (-1.0%), S&P 500 (-1.0%), and MSCI Europe (-1.4%).
- The Asia-Pacific region had rallied as high as 10% before sharply pulling back at the end of January following reports of the People’s Bank of China (PBOC) withdrawing liquidity and tightening credit as a means to ‘stabilize’ its financial system from excess speculation. Overnight bank lending rates had sharply risen to pre-pandemic levels before settling down following an end-of-month capital injection by the PBOC.
- S. small caps continued their strong run from the prior quarter with the S&P 600 Index returning 6.3% versus -1.0% for the S&P 500. S&P Pure Value returned 2.5%, outperforming S&P Pure Growth which dropped -0.6%. Growth and Value oscillated back-and-forth, a reflection of the tensions between risk-on reflation and risk-off COVID-induced slowdowns.
- Energy was the top performing sector in January benefitting from rising oil prices. Healthcare, Real Estate and Consumer Discretionary were the only positive returning sectors. Consumer Staples, Industrials, and Materials were the bottom performing sectors.
- Among risk factors, ‘Momentum’ was the only factor to generate a positive return (+1.7%) for the month partly driven by strong 4Q earnings releases from consumer technology companies, although the factor return had been as high as 6% before pulling back at the end of the month.
- Investment grade fixed income posted a moderate loss for the month as interest rates rose in reaction to the Democratic Party gaining control of the Senate following the Georgia Senate run-off. The Bloomberg/Barclays US Aggregate Bond Index dropped 0.7% as investment grade credit spreads widened for the first time since the November election.
- However, U.S. high yield continued to enjoy moderate gains as high yield spreads broke through 3% for the first time since the pandemic before rising slightly through the end of the month. The Bloomberg Barclays US High Yield Index returned 0.3%.
- Foreign currency denominated debt (both developed and emerging markets) came under pressure due to rising interest rates as well as the U.S. dollar rebounding off its lows versus major currencies.
- Within equity alternatives, Commodities posted another strong month with the S&P GSCI Commodities Index returning 4.9% on the strength of oil, industrial metals, and agricultural prices. Precious Metals and REITs both sold off at the beginning of the month (the antithesis of the reflationary trade) only to partly recover the remainder of the month. Dow Jones REIT Index ended marginally down for the month (-0.1%) while S&P GSCI Precious Metals finished down 2.1%.
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By: Benjamin Lavine