Political tensions in the country are certainly high heading into the inauguration of President-elect Joseph Biden on Wednesday. This American rite of passage feels different this time, as some 20,000 National Guard troops are stationed around Washington, D.C., and the National Mall will be closed. That’s in response to violence that occurred at the Capitol on Jan. 6 and ongoing threats in the days that followed.
The House also voted to impeach President Donald Trump a second time last week for his alleged role inciting the events on Jan. 6. With politics firmly in the spotlight again this week, we think it’s important to reiterate a central message we shared before the election on Nov. 3: Always try to avoid overweighting politics when investing. That can feel difficult during emotionally charged times like today, but presidents and their administrations have never been a pure positive or negative for markets and the economy — there are myriad factors that impact market returns and economic growth.
Markets are forward-looking mechanisms, and the election results and a difficult winter for the coronavirus have already been baked in. And rather than focusing on simmering tensions today, markets are anticipating continued broadening of economic growth and a return to normalcy later in the year, thanks to vaccines. What’s more, additional stimulus and accommodative Federal Reserve policy should provide a positive backdrop for markets in 2021.
As we always say, stick to a well-designed financial plan and remain focused on your long-term goals.
THE WEEK IN REVIEW
Tracking That Broadening Growth Story: Throughout the latter half of 2020, we’ve been tracking a positive trend that underpins our expectations for continued broadening growth in 2021: Businesses are reporting low inventory levels. When businesses run low on products, that means demand is not only strong, but they also need to replenish those goods. The replenishment cycle sets off a cascade of economic activity as producers purchase raw materials, hire workers and fire up machines to produce those goods. You can see the cycle happening in the data.
Industrial production rose 1.6 percent month-over-month in December, ahead of expectations. Manufacturing output rose, with notable gains in mining and the oil and gas sectors. And according to the Cass Freight Index, shipments rose 6.7 percent year-over-year in December. Taken together, these are both strong hints of a robust, broad growth environment in 2021.
Small Business Optimism Falls, But …: The NFIB Small Business Optimism Index fell sharply to 95.9 in December, with nine of 10 subcomponents also declining. Sales expectations and optimism for an improved economy dropped, while uncertainty about the future rose.
“Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation,” said NFIB Chief Economist Bill Dunkelberg.
However, there’s a tie back to that undercurrent of low inventories. The percentage of owners who believe current inventories are low increased two points to 7 percent — a record high. For perspective, this number is almost always negative – and prior to the past few months the highest level was 4.92 percent. Plans to accumulate inventory stayed at a strong 4 percent, one off last month’s.
Job Losses Rise, Retail Sales Slow: Initial jobless claims posted their biggest weekly gain since the pandemic hit in March, rising to 965,000 for the week ended Jan. 9. That’s the highest level in nearly five months. However, keep in mind that job losses are highly concentrated in leisure, travel and hospitality — industries experiencing the deepest impacts from the coronavirus.
In related data, retail sales dipped 0.7 percent in December from the month prior. Even ecommerce dipped 5.8 percent from November to December. Still — and this a key point — December retail sales were up 2.9 percent compared to December 2019.
Consumer Sentiment Declines: The University of Michigan Consumer Sentiment index fell to 79.2 in January from 80.7 in December. The current conditions subcomponent fell 2.3 points to 87.7, while expectations fell only 0.8 to 73.8. Beneath the numbers, there’s really a partisan undercurrent here. Many consumers are simply reacting based upon their political affiliation. Expectations, for example, rose from 83.5 to 91.3 among Democrats. This same metric was 65.7 a year ago. Expectations for Republicans dipped to 53.1 from 62.6. This same metric was in the 90s this summer and reached 123.9 a year ago.
THE WEEK AHEAD
It’s a shortened week for markets, which includes President-elect Joseph Biden’s inauguration — the big news of the week. But in terms of economic data, it’ll be a little lighter this week.
December Housing Data: We don’t mind checking in on housing data, as it’s been a bright spot through thick and thin in 2020. This week we’ll get builder sentiment in January, along with housing starts and building permits. Existing home sales figures will close the week on Friday.
Manufacturing and Services: The manufacturing and services PMIs for January will also be released Friday. Both are expected to remain in expansion territory, with manufacturing leading the way. The manufacturing data should support our theme for 2021: a continued broadening of economic growth.
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