Top Weekly Themes
- Fourth Quarter U.S. GDP – Last week the U.S. Bureau of Economic Analysis (BEA) released its “advance” estimate of the fourth quarter and full-year 2020 Gross Domestic Product (GDP). The seasonally- and inflation-adjusted quarter-over-quarter annualized rate for the fourth quarter was 4.0%, underperforming expectations of 4.2%. For the full-year 2020 GDP contracted 3.5% as a result of the COVID-19 pandemic. The fourth-quarter expansion was driven by increases in exports, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and private inventory investment; partially offset by declines in state, local, and federal spending. The growth deceleration in the fourth quarter is undoubtedly the result of increased COVID-19 restrictions and waning fiscal stimulus, the latter of which received a $900 billion boost during the final days of 2020. Inflation remains tame as the PCE price index for the final quarter increased 1.5%, and 1.4% excluding food and energy, a rather subdued rate compared to the third quarter’s 3.7% and 3.4% rates. We remain of the view that the economic environment will continue to accelerate throughout 2021 as vaccines are distributed and lockdowns are lifted.
- Where’s the Rush? – In the first Federal Open Market Committee (FOMC) meeting for 2021, Chairman Powell signaled the Federal Reserve (Fed) is in no hurry to remove its accommodative monetary policy. This likely means no near-term policy rate or asset purchase changes while the unemployment rate remains nearly 7.0% with many more individuals having left the labor force. The Fed is very focused on the labor market and getting individuals back to work. While Chairman Powell acknowledges some degree of inflationary pressures may occur in 2021, he is looking for signs inflationary trends are sustainable. During the press conference Chairman Powell reiterated the disinflationary impact from technology, an aging population, and globalization that will most likely continue to exist as the pandemic subsides. Currently, the Fed Funds Rate is expected to remain near 0.0% until the end of 2023, and Powell’s dovish comments reflect this view. Concerns about a “Taper Tantrum” driven by a reduction in the Fed’s asset purchases are likely to dissipate given the focus on the labor market and reluctance to remove accommodation in 2021. We continue to believe long-term yields will trend higher, gradually leading to a modestly steeper yield curve, although expect the Fed will use its balance sheet more aggressively if higher yields become problematic to economic growth.
- Fourth Quarter Earnings Off to a Good Start – It is early days for the fourth-quarter earnings season but results so far have been ahead of expectations. According to data compiled by Cornerstone Macro, of the 116 companies in the S&P 500 Index that have released results, over 86% of companies reported earnings per share (EPS) in-line or better than analyst estimates. Notably, results from companies in the Financial sector have mostly surprised to the upside with 91.2% reporting EPS in-line or better than expectations. Positive results for the Financial sector speak positively for Banks who report early in the season. Our participation in several Bank earnings calls coincides with these overall positive results. In general, the industry’s credit loss expectations were better than anticipated, and most expect an economic rebound during the second half of 2021. This sentiment should bode well for our Value and Small/Mid-Cap overweight that tend to have greater exposure to Banks.
Returns Table
| Equities | Week (%) | YTD (%) | 1-Year (%) | 3-Year (%) | 5-Year (%) | Div Yield (%) |
|---|---|---|---|---|---|---|
| S&P 500 | (1.7) | 0.9 | 17.7 | 39.7 | 121.0 | 1.51 |
| Russell 1000 Value | (2.3) | 0.8 | 4.1 | 13.5 | 73.8 | 2.25 |
| Russell 1000 Growth | (1.4) | 1.3 | 35.4 | 73.5 | 184.8 | 0.73 |
| Russell 2000 | (1.6) | 6.7 | 28.7 | 36.5 | 125.0 | 1.11 |
| MSCI EAFE | (2.3) | 0.6 | 10.4 | 8.7 | 60.8 | 2.36* |
| MSCI EM (Emerging Markets) | (3.9) | 4.6 | 25.6 | 15.2 | 113.9 | 1.97* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
| Bloomberg Barclays US Aggregate | 0.2 | (0.6) | 5.3 | 17.3 | 22.1 | 1.16 |
| Bloomberg Barclays US High Yield – Corporate | (0.2) | 0.4 | 7.4 | 19.4 | 54.7 | 4.24 |
| Bloomberg Barclays Municipal Bond | 0.5 | 0.6 | 4.2 | 16.0 | 20.7 | 0.95 |
| Bloomberg Barclays Global Aggregate x US (Country) | (0.3) | (0.9) | 8.8 | 9.9 | 25.0 | 0.72 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | (1.5) | 7.9 | (2.1) | (20.9) | 57.6 | 52.3 |
| Natural Gas (NYM $/mmbtu) Continuous | 6.7 | 5.5 | 39.6 | (16.1) | 22.1 | 2.7 |
| Gold NYMEX Near Term ($/ozt) | (1.5) | (2.9) | 17.1 | 36.0 | 64.7 | 1,837.9 |
| Copper Cash Official LME ($/mt) | (3.4) | 0.5 | 36.1 | 10.1 | 70.8 | 7,778.5 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.22 | 1.22 | 1.10 | 1.24 | 1.09 | 1.21 |
| Japanese Yen per U.S. Dollar | 103.57 | 103.25 | 109.14 | 108.59 | 118.70 | 104.31 |
| U.S. Dollar per British Pounds | 1.37 | 1.37 | 1.30 | 1.42 | 1.44 | 1.37 |
Chart of the Week: GameStop Short Squeeze Defies Logic
Takeaways
- The events that have transpired over the past week in some of the most heavily shorted stocks raise concerns about how groupthink or crowd psychology can spread like wildfire across social media and the internet in general.
- The financial market’s version of musical chairs will most likely hurt these retail investors the most who will be left holding overvalued shares in a company in secular decline once the music stops.
- Bryn Mawr Trust’s Equity Research Team took advantage of the assault on short-sellers and positive price action by exiting our position in ViacomCBS (VIAC). The stock had a modest level of short interest compared to GameStop (GME) but nonetheless saw its price rise more than 47% year-to-date, vs. a decline of 6 basis points (0.06%) for the S&P 500 Index.
Commentary:
How Biden’s $1.9 Trillion Stimulus Package Could Pass
Earlier this month, then President-elect Joe Biden released a $1.9 trillion coronavirus stimulus package that seemed unlikely to pass if it required 60 votes in the senate and thus 10 Republicans to vote in favor. However, there remains the possibility that the Biden Administration splits the package into two parts, like the strategy used to pass Obamacare in 2010. One part of the stimulus package would include items not likely to be allowed through the budget reconciliation process by the Parliamentarian of the U.S. Senate, thus requiring 60 votes and buy-in from 10 Republicans. The second part can proceed by way of the budget reconciliation process, requiring the 50 Senate Democrat votes and Vice President Kamala Harris breaking the tie as the 51st vote. The scope and size of this and future legislative packages will be important to monitor for their impact on economic growth, stocks, and interest rates. If the largest parts of the proposed stimulus package pass, such as the $1,400 checks, it should have a near-term positive impact on consumer spending and economic growth.
