2021 Backdrop and Chart Book

by | Jan 18, 2021 | Market Updates

The Backdrop for the Beginning of 2021

 

The Good

  • Better Economic Data – Economic data, which lags the stock market, hit rock-bottom as we expected during April and May, but early signs of a recovery have begun to appear. Now that we have a fifth round of stimulus from Congress, especially with in the unemployment area, we believe that we will continue to see increased consumer spending and job stabilization – both keys to getting out of this pandemic-induced recession.
  • Better than Anticipated Earnings – Given the record amount of stimulus, and that S&P 500 earnings are only 15% below its peak, we believe earnings growth will continue to be a determining factor of success for corporate America. Moving forward, we believe that if earnings growth in 2021 can surpass the multiple contraction that we could potentially see, since we are at 99th percentile multiple, positive future performance could occur.
  • MOAR Stimulus – Another round of potential stimulus could create meaningful potential energy for economic growth as economies fully re-open. This will likely add to corporate EPS growth recovery.

The Bad:

  • Faster-than-Expected Inflation – The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations.
  • Rise in Corporate Taxes – Now that the Democrats control the Presidency and Congress, investors, individuals, and corporations should expect some type of increase in taxes in the future. Though, it is expected, and potentially priced into the market, that the Biden administration will focus on another round of stimulus before they turn their attention to taxes. We believe that a tax increase won’t be on the table until 2022, but if this happens faster-than-expected, we could potentially see a 9% headwind for corporate earnings.

The Ugly

  • Slow Return of Service Jobs – If there is a slowdown on the job recovery front, it will take longer-than-expected to return to normalcy. Given the consumer capital on the sidelines right now, we believe it is imperative that Americans have a high propensity to spend. If business owners believe that it will take longer-than-expected for the economy to open, jobs will not come back, as expected. Business owners need to have faith in the future before they bring employees back on board.
  • Breakout of Mutated COVID-19 Strand – A complete government shutdown is unlikely, but a targeted shutdown remains an option for state and local governments, as we continue to learn more about the COVID-19 mutated strand. Just look at what Boris Johnson did in the U.K. This could potentially shatter an already fragile economy in some areas of the United States.

 

See the Chart Book here

 

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible. 

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. 

The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange-traded funds, preferred stocks, rights, warrants, units and other derivative securities. 

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. 

The Russell Midcap® Index measures the performance of the mid-cap segment of the US equity universe. The Russell Midcap® Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap® Index represents approximately 31% of the total market capitalization of the Russell 1000® companies. The Russell Midcap® Index is constructed to provide a comprehensive and unbiased barometer for the mid-cap segment. The index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true mid-cap opportunity set. 

The iShares iBoxx $ Investment Grade Corporate Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, investment grade corporate bonds. The iShares iBoxx $ High Yield Corporate Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.

Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2101-12.

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