09 January, 2021 Market Commentary

Investors Embrace Risk to Start the Year


Market Commentary for the week ending January 9th, 2021


  • It was a "Risk On" week with investors bidding up the prices of riskier investments.
  • The employment report comes in worse than expect as COVID stalls the economy.
  • U.S. government bonds suffered losses with the yield on the 10-Year Treasury closing well above 1.0%.


Technology Stocks that are NOT "Technology" Stocks

The NASDAQ, often referenced as a tech-heavy index, surprisingly outperformed broader market averages gaining +2.4%. The surprise was not necessarily that it outperformed but that it did so during a week with stocks in the technology sector were among the poorer performers gaining just +0.6%.

This apparently contradicting performance is explained by the fact that what many investors believe to be technology stocks are not categorized as such by the investment industry. The accompanying table includes several such stocks.

Stocks often thought of as technology stocks but are not

Source: www.YCharts.com

Consider that Amazon and Tesla are in the same sector as Starbucks (SBUX) and Ulta Beauty (ULTA) or that Netflix and Zoom Video are in the same industry as ViacomCBS (VIAC) and Warner Music Group (WMG). I believe most investors would not consider this to be the case. The reality is that the stocks in the above table simply have behaved and performed much more like technology stocks and their performance can have a huge impact on the performance of the NASDAQ index.

This Week’s Performance Highlights

Market Indexes week ending January 9, 2021

Source: www.YCharts.com

Everything about the first week of trading indicated investors continued appetite for risk as they appear to be looking past the current challenges and on to what is expected to be a very strong second half of 2021.

  • At the close of the week the S&P 500, the primary measure of large U.S. stocks, was higher by +1.9% while the Dow Industrials lagged up just +1.6% and the NASDAQ Composite started strong higher by +2.4%.
  • In the first of multiple examples of investors’ appetite for risk, small U.S. stocks surged +6.0% for the week. 2020 was the first year since 2016 when small stocks outperformed large as the accompanying graph shows. Clearly investors in these early days of 2021 are expecting this to continue.

    Small stocks vs large stocks

    Source: www.YCharts.com

  • The best performing sector, by a wide margin, was energy climbing a whopping +9.3%. Investors in these stocks are betting on a robust economic expansion and higher demand for oil.
  • International stocks had a great week with developed markets gaining +3.8%. Among the best performing was the United Kingdom surging +6.7% in its first week following Brexit.
  • Another example of investors embracing risk was the stellar performance of international emerging markets jumping +5.9%. China lagged behind the average, up +4.1%, while many of the more volatile nations such as Russia and Turkey saw the bigger gains.
  • The alternative asset classes of both gold and real estate were weak to start the year down -2.8% and -2.5% respectively. This is a bit contrary to some reports that investors are betting on a return of inflation in the coming year. Commodities did well up +4.5% as the price of oil climbed.
  • Bonds suffered a relatively sizable loss down -1.0% as the yield on the 10 Year U.S. Treasury rose above 1.0%. Performance across the entire bond market was not uniform though as the riskier high yield corporate bonds actually were higher by +0.1% while U.S. government bonds fell -1.4%...again, another sign of investors chasing high risk.

Interesting Numbers


An indicator of U.S. Gross Domestic Product (GDP) and Total U.S. Stock Market Capitalization was at an all-time high of 189.8%. In other words, the total value of all U.S. publicly traded stocks is nearly 2 times the total output of the U.S. economy. This is often referred to as the Buffett Indicator as legendary value investor Warren Buffett supposedly watches this as an indication of stocks being under or overvalued.

Us total market capitalization percent of GDP

Source: www.YCharts.com


2020 was one of only 5 times during the past 50 years when the cumulative return during November and December topped. The prior 4 times were followed by consistently strong returns the following year ranging from +14% to +23%. On the contrary, when November and December were negative by more than -5%, the average return in the next year was just +6.3% although in 3 of these 5 instances returns exceeded +25% while in the other two stocks were sharply lower.

Source: www.DorseyWright.com

Economic Indicators

The U.S. economy shed 140,000 jobs in December, much contrary to economists’ forecast of adding 50,000, making it the first negative report since April. The good news is that losses were concentrated in sectors directly related to slowdowns due to rising COVID numbers such as Leisure and Hospitality, losing -498,000 jobs, while other sectors such as Professional and Business Services as well as Retail Trade posted continued growth gaining 161,000 and 120,500 respectively.

The unemployment rate actually declined by 0.1% from the prior month to 6.7% as more people drop out of the labor market and are no longer counted as unemployed. This poses a potential long-term growth problem is the economy continues to expand but there are not enough workers to fill positions. That said, there are still approximately 10 million fewer people employed today as compared to pre-pandemic.

Initial jobless claims confirmed the struggling employment market with the week’s initial claims coming in nearly identical to the week before at 787,000.

The manufacturing sectors is plowing ahead in spite of rising COVID numbers with the ISM Manufacturing Index coming in at its highest level since the start of the pandemic at 60.7 (a reading above 50 indicates growth). This was ahead of forecasts with 16 of the 18 industries including the in report showing growth.

The ISM Services Index came in strong as well, topping economists’ estimates, at a reading of 57.2 although only 14 of the 18 sectors expanded for the month.

The U.S. Trade Deficit grew by 8% in November with imports rising faster than exports as the U.S. economy continued to recover. As the accompanying graph shows, the deficit shrunk to just -$37 billion in February but has rapidly expanded again to more than -$68 billion now. This expansion is consistent with a growing economy. Today’s level is just shy of the record hit in August 2006.

US trade defict

Source: https://fred.stlouisfed.org/series/BOPGSTB

Upcoming Economic Reports

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Contact Mark A. Patton :

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