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Weekly update: New year, new expectations for the economy

Happy New Year! 2020 ended with a stimulus bill in place to provide $600 checks and longer unemployment insurance ($300/week), among other features. 2021 began with an unprecedented week of chaotic news. The stock market, however, shrugged off the violence at the Capitol on Wednesday and Congress eventually certified the Electoral College votes. In this weekly review we’ll share what the market might expect now for the economy and government stimulus in 2021, as early shifts in the stock and bond markets continue to zero in on a Biden administration’s possible plans. 

Market Update: Stock markets have reached historic highs once again, which is always a nice way to start the year! Prices are quite high, so we are watchful, but as long as the current stimulus continues and vaccines are distributed more quickly to people, the stock market optimism is likely to continue. We don’t want everyone to become too complacent however, as the usual geopolitical risk, inflation risk, Covid-19 risk and other market factors will always be in play. Politics, however, seldom affect the stock market significantly. 

Behind the scenes are some interesting shifts in this market. The decline in the dollar makes international equities more attractive because profits can be brought back to the US without adding a ‘currency tax’ due to exchange rates. There are also early signs that a shift may be underway from growth to value stocks, as the latter may be wrestling the lead away after a decade of growth stocks holding the pole position in the market. As you see trades in your accounts, you may see some small changes to capture some additional value and international stocks in addition to your growth stocks. 

Finally, the ‘yield curve’ conversation is back, because behind the scenes the market is changing the longer end of the curve (10 and 20 year Treasury bonds). Recall that the Federal Reserve only controls the short end of the curve (1-3 year bonds), and the market controls the longer maturities. So here is our favorite yield curve chart again, showing how longer-term interest rates are increasing rapidly (right half of blue line): 

The Federal Reserve is keeping the left side of the graph very depressed, but the market controls the right side. Remember that as interest rates increase, bond prices go down, so you will see us shifting your bond holdings from intermediate term to short term bonds. We’ll also look at Treasury Inflation Protected Bonds to protect against the increasing risk of inflation. 

Jobs Report: December was the first time in 8 months where the number of jobs actually declined compared to the previous month. Cold weather and rapidly increasing Covid-19 hospitalizations and deaths have caused a broad pause in the economy. CNBC did an interesting analysis of what happened to jobs in the month of December: 

Stimulus Update: The graphic above reinforces the argument for some additional help to the people who normally hold the jobs that have disappeared, at least until the vaccines are more broadly available and people feel safer leaving their homes. The very weak jobs report increases the probability of additional stimulus. With Democrats holding a very small majority in Congress, expectations are that they will approve the $2,000 additional checks to people who qualify. In addition, a ‘roads and bridges’ initiative is likely to be proposed this spring, which is the key driver of the shift back to ‘value’ stocks such as heavy machinery and manufacturing. The broad policy agenda this year is expected to be moderate and focused on reopening the economy.  

Covid-19 Update: What is the key to reopening the economy? It is not when policy makers say it can open, it is when Covid-19 cases, hospitalizations and deaths decline enough for business leaders, schools and individuals to become comfortable. The graphic below of Covid deaths in the US shows the rate of deaths is heading in the wrong direction, with over 367,000 deaths confirmed. 

Business Survey: The Fed’s latest Beige Book survey of business leaders around the US revealed that for all the firms surveyed, “the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.” Health concerns and access to school/childcare are two of the big problems cited. A third of the businesses that have closed do not plan to reopen. (Axios) 

Client Corner: This month you will receive a letter from TD Ameritrade confirming your personal bank accounts that are linked to your TDAI accounts for electronic transfer. This annual notification adds a layer of security to ensure that you are aware of all authorizations that are in place for bank accounts linked to TDAI. Please review the list for accuracy and contact us if you see accounts that should be removed from this authorization. 

We have found some home meal delivery companies that deliver ready-to-eat not bad food! If anyone you know needs help with meals due to Covid or other health issues, try Goodstocksoups.com or Mom’s Meals and let us know if you have tried others! 

Next week we will be sending our quarterly letter to your homes, including 2020 in review! We will return to a weekly summary the following week. Meanwhile, be safe, and let's look out for each other.