What is Driving the Market Rally?

February 19, 2021

By Tim Courtney, Chief Investment Officer

The market has remained in a cheery mood as vaccine distribution across the country brings us closer to a broader and stronger economic recovery. However there are potential threats to a healthy recovery in 2021 and beyond, such as news of COVID-19 variants that suggest the pandemic may be something we must live with for a long time.1

Employment numbers, which quickly rebounded when lockdowns ended, have remained largely unchanged over the last several months. In February 2020, before the pandemic hit the U.S., the unemployment rate was 3.5%.2 We closed out 2020 at 6.7%, nearly double.3 The deleterious impact of unemployment has led to nearly 20% of Americans – roughly 10 million people – being behind on their rental payments and at risk of eviction.4

However, despite all of the uncertainty, the markets have continued to rally and there are reasons for investors to be optimistic. Fourth quarter earnings are coming in quite strong and better than expected.5  While corporations were seeing huge drops in revenue in 2020, they immediately began cutting expenses, leading to the above unemployment numbers but ultimately putting companies on a path to survive the COVID-19 shock.

Thousands of employees across the country are working remotely which has lowered rent, in-office costs, and travel budgets. This enhancement to the bottom line coupled with an expectation for deferred consumption and spending has many companies positioned well for 2021.6

The Federal Reserve and government have both taken extraordinary steps in an attempt to stimulate a recovery, and this has encouraged markets.7 Citizens in many cases have used funds to pay down high-cost debt and to increase savings. While this may not be immediately “stimulative” it has kept consumer confidence higher and laid the foundation for future spending.

Just as corporate cost cutting has a downside (e.g., unemployment), government and Federal Reserve actions have also created costs by pulling future growth into the present and casting doubts about the U.S. dollar’s strength. Benefits nearly always come with costs and this is a reminder why economics is known as the dismal science.

The rallying markets with high expectations of GDP and earnings growth in 2021 coupled with some weak economic indicators seem counterintuitive. This has happened many times before as markets looked past a recession and to an expected recovery in coming quarters. We’re going through a unique event, however, and a lot can happen before we see broad improvements in employment and earnings.

Just as realtors are often known for repeating “location, location, location!”, we may be remembered for advising clients to “diversify, diversify, diversify!” We should gravitate toward companies that produced strong cash flows in 2020 as well as those that are positioned to capture growth in a recovery. We should also have exposure to companies with ties to commodities and currencies other than the dollar to further diversify portfolios.

If you have any questions about your portfolio allocations amid current market and economic conditions, please contact your advisor.

Sources:

1. CDC (2/2/2021) – New variants of the virus that causes COVID-19
2. U.S. Bureau of Labor Statistics (11/12/20) – Unemployment rate falls to 6.9 percent in October 2020
3. U.S. Bureau of Labor Statistics (1/26/21) – State employment and unemployment Summary
4. CNBC.com (1/25/21) – Nearly 20% of renters in America are behind on their payments
5. CNBC.com (2/12/21) – Cramer’s week ahead: Earnings season has been ‘far better’ than expected
6. CNBC.com (2/10/21) – One big reason the market is still rallying: Companies are slashing costs
7. Investopedia (2/17/21) – Here’s what countries are doing to provide stimulus and relief

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this informational piece. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate.  In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content.  We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments.  The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information being provided herein. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance.  Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC).  However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements.  Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971

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