Market Overview – January 2021

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Market performance January 2021 and your investments

After an eventful 2020, developed equity markets took somewhat of a breather at the start of 2021. While we all waited patiently to see just how effective the global vaccine rollout can be, returns were depressed. Emerging Markets, in particular China, on the other hand, produced strong returns in the month, reiterating the speed at which their economy is returning to growth after the pandemic.

The incendiary US Election season comes to a close:

• Donald Trump once again made headlines delivering a charged speech to supporters citing election fraud and ‘theft’ of his victory. It resulted in rioters storming the Capitol and Trump was later impeached on the grounds of incitement, making history by becoming the first President ever to be impeached twice.
• Victory in both contested seats in the Georgia run-off saw the Democrats take control of the Senate, giving them a sweep of both houses of Congress for the first time since Barack Obama’s first term in 2009.
• President Biden was sworn into office and swiftly went about utilising executive orders to reverse some of Trump’s more controversial actions which saw, importantly this included the return of the US to the Paris Climate Agreement.

Continued economic support from governments and central banks:

• Incoming United States secretary of the treasury, and former chair of the Federal Reserve, Janet Yellen told politicians and the US government that they need to ‘act big’ as a way to support the economy.
• UK Chancellor Rishi Sunak said firms in retail, hospitality and leisure would get one-off grants worth up to £9,000 each to help weather a lockdown set to last at least six weeks. There was also a £594m discretionary fund to support other impacted businesses that were not eligible for the grants.
• In Europe, the European Central Bank (ECB) kept all its policy levers unchanged but did allude to further easing if needed. President ECB Christine Lagarde stressed that the any further action from the bank would be dictated by financial conditions in the euro area, which are ‘clearly anchored’ to inflation. Overall, she described the ECB's assessment as "steady" but added that the bank was ready to adjust and use all instruments in their power if necessary.

Lockdown measures slow the recovery:

• UK PMI services activity dropped in December, with margins coming under pressure from rising costs and discounted prices. December's result took the score for the final quarter of 2020 to 49.5 - a contraction compared with a solid recovery of 57.1 in the third quarter. The downturn was overwhelmingly linked to business disruption, restrictions and closures caused by the COVID-19 crisis.
• The UK service sector swung back into decline after the partial recovery seen during Q3 2020, which was largely down to tighter restrictions on consumer services. Naturally, the third national lockdown will mean service providers will be braced for a sustained period of subdued economic conditions and deferred client spending in the first quarter of 2021.
• December data confirmed that UK inflation rose to 0.6%, up from 0.3% in November despite the closure of non-essential shops. Clothing prices put upward pressure on inflation as did transport costs (air, sea and coach fares) and petrol prices as some travel restrictions eased during parts of December. These were partially offset by falling food prices, notably for vegetables and meat.

Summary:

Investors could not be blamed for asking the question, “where have all the potential catalysts gone?” In late 2020 we saw confirmation of a successful vaccine that can hopefully slow the spread of COVID-19 and bring the world back to some form of normality, Donald Trump’s controversial presidential reign was ended by Joe Biden, and we saw the signing of a Brexit agreement. While it cannot be ignored that the potential news flow that could cause an immediate fillip for markets may have reduced, we also now find ourselves hopeful that markets may return to the ‘steady growth’ that had been seen before the world was blindsided by the pandemic. Whilst immediate potential catalysts may have passed, on the flip side this also means some of the potential roadblocks for the market may also have subsided.