Market Commentary for the week ending January 23th, 2021
- U.S. stocks gain as technology stocks post their biggest weekly gain of the year.
- China's market surges to double-digit gains in 2021 but is yet to make new highs.
- Housing numbers came in strong for December but could be slowing with interest rates up for the year.
China's Market Surges but Has Struggled
China's stock market surged this week gaining +6.3% and is higher by a whopping +11.4% so far in 2021! It is being helped by strength in their economy as it was one of the only in the world growing in 2020 (up +2.3%). Furthermore, the country’s growing middle class is now investing in the market fueling more demand for stocks and resulting higher prices.
Although China's market has had a strong start to 2021, it has woefully lagged behind for many years as illustrated in the below graph. Using the iShares China large-cap ETF (FXI) as a proxy for their market, we see that since late 2004, the furthest back we have data, it has outperformed the S&P 500 but only because of a massive surge early on into late 2007.
From the October 2007 peak 13+ years ago, China’s market collapsed, recovered, and has struggled to maintain an extended bull market. It is still below its 2007 high by -2.3% while the S&P 500 is +145% ABOVE its 2007 high.
Many investors expect great things from the China market in coming years as its economy continues to likely grow but they need to be aware that it can go through both short and rapid declines as well as extended periods of little or no gains.
This Week’s Performance Highlights
- Stocks turned in another positive week, making it 2 for 3 so far in 2021, with large U.S. stocks, as measured by the S&P 500, gaining +1.2%. The Dow Industrials lagged behindcoming in unchanged while the tech-heavy NASDAQ Composite rallied +3.3%.
Year-to-date, as illustrated below, the NASDAQ has taken an early lead over the other two indexes helped by stocks such as Applied Materials (AMAT), Lam Research (LRCX), and KLA Corp. (KLAC), all multi-billion dollar companies up +17% or more in 2021.
- Technology stocks were the best performing sector for the week, the first time this year, gaining +3.2%. Prior to this gain they had been in negative territory for the year. Although the market was broadly higher, 5 sectors were lower with energy and financials off the most, -5.4% and -3.6% respectively.
- Small U.S. stocks have had a fantastic start to the year but did lag behind large stocks this week gaining just +0.5%. Year-to-date they are higher by +9.7% or more than 4 times the S&P 500!
- 39 of the S&P 500 companies reported earnings for the week with the average beating Wall Street estimates by +15%. We’ve got a big week ahead with 130 more companies scheduled to report.
- International stocks were mixed with developed country stocks lower on average by -0.6%. Eurozone stocks were among those on the lower end of average with Spain, as an example, falling -4.2% while stocks in Australia edged higher.
- Emerging markets continued to do better adding to their year-to-date gains up another +1.3% for the week. The big winner, as noted above, was China but there were also some big losers including Brazil and Russia losing -9.3% and -6.4% respectively.
- The alternative asset classes were mixed with real estate stocks posting a strong gain of +2.1% putting them back in positive territory for the year. Gold was higher by +0.4% but is still down -2.5% in 2021 while commodities fell -2.6% for the week, on a drop in oil prices, but are still higher by +3.6% year-to-date. These assets continue to provide meaningful diversification in a portfolio.
- Bond prices gained a small +0.1% and are still lower for the year by -0.9%. There does seem to be some increased concern about the amount of borrowing by our government but those concerns historically have not persisted in a way, so far at least, that has impacted bond prices long-term.
The typical homeowner, as of 2020, had been in their home for 13 years. According to a study by real-estate brokerage firm Redfin, this has been climbing steadily and is nearly twice as long as it was in 2005. In addition to a tight supply of homes for sale, another factor is that baby boomers are staying healthier longer and choosing to stay in their homes.
Former President Trump’s business revenue fell by an estimated -45% during 2020 and early 2021 as compared to a 15-month period at the start of his presidency. For example, his hotel in Washington D.C. saw revenue drop to $15.1 million from $40.5 million the year before. Although total numbers were down, his Mar-a-Lago club in Florida saw an uptick in revenue. These disclosures are a bit vague but clearly suggest a challenging environment.
Source:Private Wealth Website
The housing market continues to be red-hot as people seek larger homes in a pandemic environment. New home construction surged to a more than a decade high, up +12% in December, far exceeding economists’ forecast to an annual run rate of 1.67 million homes. This end-of-the-year growth was all in the single-family space while multifamily starts actually fell -15.2%.
Three of the biggest home builders’ stocks were among the top 10 performers in the S&P 500 this week: Pulte Homes (PHM) rallying +15.3%, Lennar Corp. (LEN) gaining +12.8%, and D.R. Horton (DHI) up +12.6%. All three have had a strong run and are either at or close to all-time highs and could continue but also have experienced long cycles of underperformance that pose arisk investors should consider.
Although housing starts have been trending sharply higher for the past decade and at levels not seen since 2006, they are still meaningfully below the peaks of other cycles as illustrated in the below graph. Furthermore, as illustrated in our blog a few weeks ago, the months supply of homes for sale remains near record lows.
Existing home sales for December also came in stronger than expected running at a pace of 6.76 million annuallyin spite of the tight supply. Over the last 12 months, home prices have increased in every region of the country averaging a +13% gain. There are some expectations that the market could cool a bit as interest rates have inched higher.
Initial jobless claims remained persistently high for the week with 900,000 new claims filed on record coronavirus numbers. When including claims filed both via states and temporary federal programs, initial claims totaled 1.32 million.
A positive sign for the broad economy is that a survey by a private company Markit reported that its manufacturing index climbed to 59.1 and its services index to 57.5 (any reading above 50 indicates growth). Both numbers indicate accelerating growth and were better than expected. This could suggest a better than expected report on gross domestic product (GDP) in the coming week.
Upcoming Economic Reports
- Gross Domestic Product (GDP)
- S&P Case-Shiller Home Price Index
- Durable Goods Orders
- Consumer Confidence Index
- Initial Jobless Claims
- Consumer Spending