Weekly Recap: COVID-19 Market Edition

Ryan NaumanMarket Strategistryan.nauman@informa.com

For the week ending January 8, 2021

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The S&P 500 index continued to display resiliency in the eyes of uncertainty during the first week of 2021 as the broad market index rose 1.88% .

The manufacturing sector continues to rebound after dealing with a trade war and the ongoing pandemic. The Markit manufacturing PMI rose to 57.1 in December from 56.7 in November, meanwhile, the services PMI fell to 54.8 in December from 58.4 in November. Additionally, the ISM manufacturing index rose to 60.7% in December from 57.5% in November, while the ISM services index rose to 57.2% in December from 55.9% in November.

For the first time in eight months the U.S. lost jobs as the coronavirus pandemic spiked higher, forcing businesses to cut jobs. The U.S. lost 140,000 jobs in December while the unemployment rate remained at 6.7%. Not surprising, the leisure and hospitality industry was hit hardest as it lost 498,000 jobs. However, the professional and business services industry added 161,000 jobs while the retail industry added 120,500 jobs during the holiday shopping season. While the economy has been recovering, the December report shows the labor market has stalled, which could result in poor economic growth during the end of 2020 and beginning of 2021. The slowdown may not speed back up until the pandemic vaccine is more widely distributed.

One of my final themes for 2020 was the stock market’s resiliency. Despite unprecedented uncertainty around the global pandemic and politics, the S&P 500 index posted a +18.40% return in 2020. The market’s resiliency continued during the first week of 2021. The week started relatively quietly but equities reacted favorably, particularly the reflation trade of small caps, financials, materials, energy, and industrials following the Georgia state runoff elections, as the Democrats took control of the Senate and House. Investors believe the election outcome will lead to additional fiscal spending in the form of more fiscal relief and infrastructure spending resulting in larger economic growth and an uptick in inflation. The razor thin line separating the democrats and republicans in congress means that Biden’s agenda calling for higher taxes and aggressive regulations is no foregone conclusion. 10-year Treasury yields rose above 1% for the first time since March as investors expect an increase in fiscal stimulus will result in faster economic growth, more on this shortly. The solid performance from small caps, financials, industrials, materials and the increase in Treasury yields was no surprise based on the election results, what was a surprise was the market performance as Wednesday progressed.

The market’s resiliency was on full display during the later stages of Wednesdays’ trading hours as thousands of President Trump’s supporters stormed the U.S. Capitol in protest of Joe Biden’s Electoral College win. Despite the unprecedented uncertainty and chaos, markets only gave back minimal gains. The reflation trade continued throughout the day as the Russell 2000 index finished the day +4.1% and the S&P 500 index posted a +0.6% return, while long-term Treasury yields all increased (10yr +8.9bps, 20yr +11.5bps, 30yr +10.3 bps). The market rally in midst of total uncertainty confirmed the strength of the rally and that investors remain focused on fiscal stimulus and an improving economy.

There are additional contradicting forces that will drive Treasury yields during the year. First, an increase in fiscal spending without offsetting revenue (tax hikes) will result in more government borrowing i.e. higher bond issuances. The increase in bond supply will force the Treasury to offer higher yields to make them more attractive to investors. Second, 10-year Treasury yields have risen after hitting their March lows of 0.40%, in large part due to an improving economy and positive results towards a pandemic vaccine. The economy looks to expand in 2021 and expectations for higher inflation are growing, which will support higher yields. Third, the Federal Reserve (Fed) has remained steadfast that it will keep interest rates near zero until inflation averages 2% and unemployment levels normalize, which may not happen until 2022, at the earliest. Furthermore, the Fed may feel the need to boost the economy by managing the Treasury yield curve with continued bond purchases which would help cap yields across all maturities. Fourth, consumers are saving more and the U.S. population as aging which will place downward pressure on yields. Fifth, Treasury yields are higher than other sovereign debt, which will make Treasuries more attractive to foreign buyers, resulting indownward pressure on yields.

We must also consider the effects increased fiscal stimulus and an expanding economy may have on monetary policy and inflation. One of my concerns heading into 2021, was the potential for a taper tantrum or an unexpected increase in interest rates. The Fed may have a tough decision to make if the economy runs too hot and inflation climbs due to additional massive fiscal stimulus and the reopening of the economy. The Fed may feel compelled to tighten policies by reducing bond purchases and hiking key short-term interest rates if it feels that inflation is on the verge of getting out of control. These monetary actions, signals, and/or plans have the potential to set off a taper tantrum similar to 2013.

Commentary

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Sources: Zephyr StyleADVISOR, Macrobond, PSN Enterprise, Bloomberg. 1-week data as of 1/8/21, unless otherwise stated, time periods over 1 week as of 12/31/20. Equity Style Performance represented by: Large Value – Russell 1000 Value, Large Blend – Russell 1000, Large Growth – Russell 1000 Growth, Mid Value – Russell MidCap Value, Mid Blend – Russell MidCap, Mid Growth –Russell MidCap Growth, Small Value – Russell 2000 Value, Small Blend – Russell 2000, Small Growth – Russell 2000 Growth.

Global Asset Class Performance

Index 1 Week 3-Mos YTD 1 Year 3 Year 5 YearS&P 500 1.88% 12.15% 18.40% 18.40% 14.18% 15.22%

Russell 3000 2.31% 14.68% 20.89% 20.89% 14.49% 15.43%

Russell 1000 2.06% 13.69% 20.96% 20.96% 14.82% 15.60%

Russell MidCap 3.19% 19.91% 17.10% 17.10% 11.61% 13.40%

Russell 2000 5.93% 31.37% 19.96% 19.96% 10.25% 13.26%

MSCI EAFE 3.16% 16.09% 8.28% 8.28% 4.79% 7.97%

MSCI EM 4.83% 19.77% 18.69% 18.69% 6.56% 13.22%

1 Mos Value Blend GrowthLarge 3.83% 4.23% 4.60%

Mid 4.63% 4.68% 4.80%

Small 7.92% 8.65% 9.35%

YTD Value Blend Growth

Large 2.80% 20.96% 38.49%

Mid 4.96% 17.10% 35.59%

Small 4.63% 19.96% 34.63%

Factor Index 3 Mos YTD 1 YR Risk-Adj %

MSCI USA Small Cap 28.90% 18.90% 14.88%

MSCI USA Value 14.07% 0.95% 1.11%MSCI USA Minimum Volatility 6.93% 5.76% 6.24%

MSCI USA Momentum 9.40% 29.62% 29.77%

MSCI USA Quality 10.03% 22.92% 25.30%

MSCI USA Dividend Tilt 11.06% 7.97% 8.30%

Index 1 Week 3-Mos YTD 1 Year 3 Year YieldBloomberg Barclays US Aggregate -0.94% 0.67% 7.51% 7.51% 5.34% 1.22

Bloomberg Barclays US High Yield 0.23% 6.45% 7.11% 7.11% 6.24% 4.93Bloomberg Barclays Municipals 10 Yr -0.12% 1.78% 5.62% 5.62% 4.88% 0.93

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

1/8/21 1/1/21 12/31/20 12/31/20 1/8/20 1/8/182-yr U.S. Treasuries 0.14 0.13 0.13 0.13 1.58 1.9610-yr U.S. Treasuries 1.13 0.93 0.93 0.93 1.87 2.4930-yr U.S. Treasuries 1.87 1.65 1.65 1.65 2.35 2.8110-yr German -0.53 -0.56 -0.56 -0.56 -0.25 0.4310-yr Japan 0.03 0.02 0.02 0.02 -0.03 0.0610-yr U.K. 0.29 0.19 0.19 0.19 0.75 1.23

Major Fixed Income Asset Class Performance

Rates

Chart of the Week: Growth Stocks Had a Stellar 2021Zephyr StyleADVISOR Zephyr Portfolio AnalyticsJanuary 2020 - December 2020 (not annualized if less than 1 year)

Ret

urn

0

5

10

15

20

25

30

35

40

1 year

Russell 3000 GrowthRussell 2000MSCI EM (EMERGING MARKETS)S&P 500MSCI EAFE IndexRussell 3000 Value

COVID-19 Dashboard: The # Of Coronavirus Cases In The U.S. Reaches 22 Million

Source: Macrobond, World Health Organization 4

Source: Macrobond, Centers for Disease Control & Prevention 5

COVID-19 Dashboard: New Daily Cases Surge Higher

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Markets: Growth Stocks Outperformed During The Year While Value Stocks Underperformed

Zephyr StyleADVISOR Zephyr Portfolio Analytics

January 2020 - December 2020 (not annualized if less than 1 year)

Ret

urn

0

5

10

15

20

25

30

35

40

1 year

Russell 3000 GrowthRussell 2000MSCI EM (EMERGING MARKETS)S&P 500MSCI EAFE IndexRussell 3000 Value

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Markets: Despite Being Filled With Heartache & Uncertainties, Equities Had A Solid 2020

Zephyr StyleADVISOR Zephyr Portfolio Analytics

Thursday, January 2, 2020 - Friday, January 8, 2021 (Single Computation)

60

70

80

90

100

110

120

130

Jan 01, 2020 Feb 19, 2020 Apr 06, 2020 May 22, 2020 Jul 10, 2020 Aug 26, 2020 Oct 13, 2020 Jan 08, 2021

S&P 500

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Markets: Gold & Emerging Market Equities Were The Top Performing Cross Asset Classes in 2020

Zephyr StyleADVISOR Zephyr Portfolio Analytics

January 2020 - December 2020 (not annualized if less than 1 year)

Ret

urn

-60

-40

-20

0

20

40

1 year

Gold London PM FixingMSCI EM (EMERGING MARKETS)S&P 500MSCI World IndexBloomberg Barclays Global AggregateICE BofA Global High YieldBloomberg Barclays EM USD AggregateFTSE 3-month T-billDow Jones Global Select REITS&P GSCIS&P GSCI Crude Oil

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Markets: In 2020, Technology (+43%) Was The Best Performing Sector Followed By Consumer Discretionary Sector (+32%)

Zephyr StyleADVISOR Zephyr Portfolio Analytics

Thursday, January 2, 2020 - Thursday, December 31, 2020 (not annualized if less than 1 year)

Ret

urn

-40

-30

-20

-10

0

10

20

30

40

50

AnalysisPeriod

S&P 500 Information Technology (Sector)S&P 500 Consumer Discretionary (Sector)S&P 500 Communication Services (Sector)S&P 500 Materials (Sector)S&P 500 Health Care (Sector)S&P 500 Industrials (Sector)S&P 500 Consumer Staples (Sector)S&P 500 Utilities (Sector)S&P 500 Financials (Sector)S&P 500 Real Estate (Sector)S&P 500 Energy (Sector)S&P 500

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Markets: Korean & Chinese Equities Outperformed In 2020

Zephyr StyleADVISOR Zephyr Portfolio Analytics

January 2020 - December 2020 (not annualized if less than 1 year)

Return

-20 -10 0 10 20 30 40 50

1 year

MSCI KOREAMSCI CHINAMSCI JAPANMSCI SWITZERLANDMSCI GERMANYMSCI AUSTRALIAMSCI WORLD ex USAMSCI CANADAMSCI ITALYMSCI MEXICOMSCI SPAINMSCI UNITED KINGDOMMSCI RUSSIAMSCI BRAZILS&P 500

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Markets: The Momentum & Quality Factors Outperformed While The Value Factor Underperformed In 2020

Zephyr StyleADVISOR Zephyr Portfolio Analytics

January 2020 - December 2020 (not annualized if less than 1 year)

Ret

urn

0

5

10

15

20

25

30

1 year

MSCI USA MOMENTUMMSCI USA QUALITYMSCI USA SMALL CAPMSCI USA DIVIDEND TILTMSCI USA MINIMUM VOLATILITY (USD)MSCI USA VALUEMSCI USA

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Markets: All Major Fixed Income Asset Classes Had Solid Performance In 2020

Zephyr StyleADVISOR Zephyr Portfolio Analytics

January 2020 - December 2020 (not annualized if less than 1 year)

Ret

urn

0

2

4

6

8

10

1 year

Bloomberg Barclays U.S. Treasury: 7-10 YearBloomberg Barclays U.S. Corporate Investment GradeBloomberg Barclays Global Treasury ex-U.S.Bloomberg Barclays U.S. AggregateBloomberg Barclays U.S. Corporate High YieldBloomberg Barclays Municipal BondBloomberg Barclays U.S. Treasury: 1-3 Year

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Markets: Blended Portfolios Had A Solid 2020

Zephyr StyleADVISOR Zephyr Portfolio AnalyticsThursday, January 2, 2020 - Friday, January 8, 2021 (Single Computation)

75

80

85

90

95

100

105

110

115120

Jan 01, 2020 Feb 19, 2020 Apr 06, 2020 May 22, 2020 Jul 10, 2020 Aug 26, 2020 Oct 14, 2020 Jan 08, 2021

20% S&P 500/80% Bloomberg Barclays Agg 40% S&P 500/60% Bloomberg Barclays Agg 60% S&P 500/40% Bloomberg Barclays Agg 80% S&P 500/20% Bloomberg Barclays Agg

Blend WeightsAs of January 8, 2021

20% S&P 500/80% Bloomberg Barclays Agg 40% S&P 500/60% Bloomberg Barclays Agg

60% S&P 500/40% Bloomberg Barclays Agg 80% S&P 500/20% Bloomberg Barclays Agg

78.0%

22.0%

42.9%

57.1%

37.2%

62.8%

81.8%

18.2%

S&P 500Barclays U.S. Aggregate

Source: Macrobond, U.S. Department Of Labor 14

Economy: Pace Of Jobless Claims Pick Back Up

Source: Macrobond, U.S. Bureau Of Labor Statistics 15

Economy: The Job Market Comes To A Halt After Losing 140K Jobs In December

Source: Macrobond, U.S. Bureau Of Labor Statistics 16

Economy: Unemployment Rate Remains At 6.7%

Source: Macrobond, U.S. Bureau Of Labor Statistics 17

Economy: Inflation Remains Muted & Well Below The Fed’s 2% Target

Source: Macrobond, 18

Economy: Inflation Expectations Climb Above 2% On Additional Stimulus Packages And Optimism Over Economic Growth

Source: Macrobond 19

Economy: Yields Rise On Expectations For More Fiscal Stimulus

Source: Macrobond, 20

Economy: Yield Curve Has Steepened

Source: Macrobond, Federal Reserve 21

Monetary Policy: While The Fed’s Balance Sheet Expands, Equities Have Reached All Time Highs

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All Eyes On……..

Day Event/Earnings

Monday, January 11

None Scheduled

Tuesday, January 12

U.S. NFIB Small-Business Index (Dec.), Job Openings (Nov.)

Wednesday, January 13

U.S. Consumer Price Index (Dec.), Federal Budget (Dec.)

Thursday, January 14

U.S. Jobless Claims (Jan. 9)Delta Air Lines, Blackrock, Inc

Friday, January 15

U.S. Retail Sales (Dec.), Empire State Index (Jan.), Industrial Production (Dec,)JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Company

The week ahead will be highlighted by the release of the December consumer price index. Inflation is in the crosshairs of investors as Inflation expectations have been increasing, particularly this week as investors are anticipating additional fiscal stimulus following the Georgia election.

Additionally, large financial corporations kick off the fourth quarter earnings cycle during the week. Corporate earnings are expected to increase during the quarter. However, coronavirus cases surged during the quarter which may place downward pressure on earnings.

About Ryan Nauman

As Market Strategist, Ryan Nauman’s primary focus is providing value added market and investment insight along with educating buy-side participants on investment analytics and portfolio management concepts.

Ryan provides analysis and research on market trends across asset classes, sectors, and regions to help empower better decisions for creating asset allocation strategies. His insight is disseminated through white papers, articles, training, and interviews with a target audience of financial advisors, portfolio managers, and investment analysts.

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