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Weekly market update - 19th of January 2021

Written and accurate as at: Jan 19, 2021 Current Stats & Facts

Weaker economic data, chatter about the possible timing of a Fed taper and concerns over delays in vaccination programs weighed on market sentiment last week.

Economics and policy

President-elect Biden proposed a new stimulus bill of US$1.9 trillion with measures including a federally-mandated minimum wage. His current approach would require a degree of Republican support, so this initial package is likely to be watered down. Expectations are the final bill will be between US$1.1 trillion and $1.6 trillion and the minimum wage legislation will be dropped. However, the stimulus is still materially above the US$800 billion to US$1.4 trillion many had been expecting.

As it stands, nominal disposable income is expected to surge in Q1 2021 to levels above that of Q2 2020. Coupled with pent-up demand as lockdowns and restrictions are rolled back in the northern Spring, this is likely to provide stiff economic tailwinds. Goldman Sachs last week upgraded its 2021 US GDP estimate from 4.1% to 6.6%, with 10% growth in Q2 and 9% in Q3.

At this point, however, economic data continues to reflect previous stimulus payments rolling off, as well as rising Covid cases and pre-election uncertainty. US December retail sales provide the most recent example, falling 0.7% versus an expectation of 0%. Consumer sentiment surveys also remain soft.

The scale of stimulus is also reflected in higher inflation expectations, prompting some concern that the Fed might have to “taper” its bond purchases sooner than otherwise thought.

The fear here is of a 2013-style tantrum in markets. A number of Fed officials have downplayed this risk, including Chair Powell and Richard Clarida who is widely tipped to be Powell’s successor.

Covid and vaccines

Case numbers fell last week — while still remaining at high levels — as the impact of lockdowns took effect. US hospitalisations are also falling for the first time since September, although several areas remain under strain.

The impact of the vaccine roll-out on hospitalisations is the key issue to watch. Vulnerable parts of the population such as the elderly comprise a disproportionately high segment of hospitalisations and deaths. Concentrating vaccinations on this cohort may mean that hospitalisations start to fall in February even if cases do not. Mortality rates may also start declining, with a lag.

The rate of vaccinations in the US doubled in the last week. Some 11.1 million Americans have now been vaccinated (about 3% of the population) up from 6 million people a week earlier. Importantly, half of the phase 1A population — deemed the most vulnerable — and a third of long-term care residents have had their first doses.

We may reach a point in late February where a number of economies can consider re-opening since Covid will no longer be straining the health care system. In this vein, it’s been noticeable that government rhetoric has focused on a vaccine’s ability to prevent severe infections, rather than preventing infection entirely.

There have been reports the Oxford vaccine may produce better results in the more thorough AstraZeneca trial, than the 70% efficacy achieved in earlier iterations. 

Johnson & Johnson released data from its phase 1 trial — but we are still waiting to hear the results of the larger phase 3 trial. The latter is worth watching because it’s a one-dose regimen, which looks to deliver neutralising antibodies in line with the AstraZeneca/Oxford two-dose vaccine.

Further developments on the vaccine front may help calm concerns about vaccine availability and the timing of a roll-out.


Sentiment swung about last week, seeing some rotation between the cyclical reflation trade and the growth trade.

Valuation remains a key concern in some quarters.

The scale of expected earnings coming through for the next few quarters is helping alleviate some of this. The MSCI World P/E, for example, is still well below its 2000 peak. It is also important to remember that high valuations are concentrated in the growth part of the market, with value nowhere near as extended.

Bond yields remain the key driver of growth stock valuations — and therefore remain a key factor to watch.

The recent rise in bond yields has been driven by inflation expectations rather than a shift in nominal yields. This is important because inflation expectations are highly correlated with the performance of cyclical — suggesting they can continue to do well while the market believes the Fed will accommodate stimulus. Nominal yields remaining low is an issue for financials. 

Real yields (nominal minus inflation expectations) influences growth stock valuations. The massive increase in fiscal stimulus takes some pressure off monetary policy, which may mean real rates not materially decline much further from here. This could affect the performance of growth stocks.

It is worth noting that a value rotation is likely to benefit the Australian equity market in comparison to the US, given our higher proportion of value stocks.

The ASX was off slightly last week. Banks and energy performed best; staples and health care the worst.

Afterpay (APT, +14.8%) was the best performer, overtaking Telstra (TLS) to become Australia’s 12th biggest company. It was helped by the US IPO of buy-now-pay-later (BNPL) firm Affirm (AFRM), which doubled on its first day, setting a new benchmark for a revenue multiple valuations in the sector. BNPL companies remain the market’s hottest segment. The risk lies in the fact that they are all priced for success, which is questionable.

The rest of the tech sector fell on further rotation to value — though this bucked the US trend where the NASDAQ performed in line with the rest of the market.

Altium (ALU, -9.7%) was the worst performer on the ASX100. Management announced that — while they remained committed to full-year revenue targets — they were tracking below the required run rate.

Elsewhere, energy stocks continued their recovery, helped by higher spot LNG prices. Recent strength in prices is likely to be temporary - reflecting a cold North Asian winter and a coincidence of maintenance-related supply disruptions.

Gold stocks fell on fears of rising bonds yields; bonds themselves were relatively flat on the week.

US dollar sensitives also fell, more as a funding source for banks, energy and resources.          

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