3 Market Themes to Watch in the First Quarter of 2021

January 5, 2021

By Tim Courtney, Chief Investment Officer

2020 is officially in the rearview mirror, and as we begin a new year, there are plenty of variables that could drive the markets in 2021. These three top our list of items we will be watching closely.

1. Vaccine rollout. The stock market has rallied in the last several weeks over expectations of a swift COVID-19 vaccine rollout.1 Efficient execution of this initiative is critical for a couple of reasons. First, many households and small businesses nationwide are hanging on by a thread and desperate for a fully reopened economy as soon as possible.2 It’s also necessary to boost consumer confidence and spending behavior. Even in areas without a lockdown in place, consumers are wary of participating in the economy and have saved cash at record levels.3 Widespread vaccination will enable U.S. consumers to feel more comfortable engaging in normal spending habits and help catalyze deferred consumption needed for a full economic recovery.

2. Interest rates. Despite strong economic growth in the third4 and fourth quarter5 of 2020, interest rates have remained stubbornly flat with the 10-year Treasury ending the year below 1%.6 This is one of the few market signals forecasting potential weakness ahead. In the coming weeks and months, we’ll be watching to see if interest rates can move meaningfully higher to match the positive market sentiment exuded by equities and other assets.

3. Federal spending and legislation. We now know there will be a unified government by the slimmest of margins. The market reacted by moving interest rates slightly higher at least for now.6 The market also seems to be expecting greater government spending and debt. With Democrats controlling the White House, Senate and House, it is more likely that tax rates, especially corporate rates, will increase and markets will have to account for this. Lastly, there is potential for more active regulatory policies that may affect corporate decision-making in terms of corporate spending, buybacks and dividends.7

There are still several variables we’re seeking clarity on as we commence 2021, but it appears very likely that earnings should have a healthy recovery from 2020’s decline. We will continue to keep a close eye on the factors discussed above to guide our investment decisions this quarter and throughout the year. If you have any questions, please contact your Exencial advisor.

Sources:

  1. The Financial Times (12/2/20) – The ‘everything rally’: vaccines prompt wave of market exuberance
  2. CNBC Make It (10/15/20) – 7 months into the pandemic, small business owners don’t know how much longer they can hold on: ‘We are in survival mode’
  3. NextAdvisor (11/13/20) – The pandemic has resulted in record U.S. savings rates, but only for some
  4. CNBC (10/29/20) – U.S. GDP booms at 33.1% rate in Q3, better than expected
  5. Federal Reserve Bank of Atlanta (12/23/20) – GDPNowTM
  6. CNBC (data as of 1/8/21) – U.S. 10 Year Treasury
  7. Fortune (1/8/21) – It’s officially a blue wave. What that historically means for stocks

 

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