What’s not to like about this list? Trillions more in stimulus, vaccines allowing a back-to-normal economy and a lowering of the political temperature – those are all good things. Yet, last week was a reminder that markets buy ahead of the news, and sell when the facts are revealed, making for a bumpy ride.

Help is on the way. President-Elect Biden announced his stimulus plan, but it merely met market expectations of around $2 trillion. The next step is harder, getting it through both houses of a narrowly-divided Congress. The final figure is likely to be whittled down. But we doubt that will stop the bullish sentiment. After all, investors continue to buy small-caps in anticipation of better times ahead.

Jilted QQQ lovers. For the major indexes, however, there could be more turbulence as equity positioning still favors the mega-cap companies. Our favorite measure to monitor positioning pain in large-cap equities, the Russell 2000 index versus the NASDAQ 100 index, added 3.8% in relative performance last week. Year-to-date, small-caps (RTY) are ahead by 8.2%, a record start to the year.

Growth slowdown in the here and now outweighed the optimistic future. The S&P 500 fell and credit spreads widened as the extent of the growth hit from the pandemic became clearer. Two data points – jobless claims and retail sales – reinforced how much the out-of-control spread of the virus is hampering economic activity in the U.S.:

  • Almost 1 million new job losses were recorded in the second week of January, the most since August
  • Retail sales in December contracted for the third straight month

The two hottest topics in the fixed income market were in the news: the Fed asset purchase program and the outlook for inflation. Each took some steam out of the recent market narrative, and yields ended the week lower. Fed Chair Powell squashed talk of a tapering of asset purchases. Central bank leadership is united, there will be no reductions this year. And last week’s Consumer Price Index print was merely in line with estimates. That threw cold water on market-based expectations for hotter inflation in the not-too-distant future.

There is no buyer’s strike in Treasury auctions. Another factor causing bond yields to tumble is the fact that demand for U.S. debt is going up, not down, as interest rates increase. Last week’s 30- year bond auction saw record end-user purchases; fears of a buyer’s strike are not materializing.

What to Watch This Week

  • Central banks – This week sees a slew of central bank meetings, 10 by our count.  Pay attention to their projections on a recovery and the expected path for monetary policy.  Policy is more coordinated than ever, and the $17 trillion in negative yielding global debt exerts a powerful downward force on interest rates. Signs of that changing should be closely monitored.
  • Politics – It will be a jam-packed week for politicians in Washington, D.C.  Markets will likely ignore the inauguration; watch the backchanneling on Biden’s stimulus bill (Senator Joe Manchin and the centrist Senate Republicans are the focus) and the plan for impeachment in the Senate. Could Senator Mitch McConnell try to gum up the machinery of government with hearings that delay stimulus and cabinet appointments?
  • Virus & Vaccines – Vaccine efforts are ramping up, and Johnson & Johnson may report data on their experimental version this week. We are focusing on the new strain, now spreading in the U.S., as something that could materially derail the recovery trajectory.

This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

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