January 22, 2021
Joe Biden became the 46th president of the United States this week and his inauguration fueled a continuation of the market’s rally on hopes that a large coronavirus and stimulus package will soon be passed by a Democratic-controlled Congress. While U.S. economic data was generally light this week, with housing starts and existing home sales being the highlights, a strong start to the Q4 2020 earnings season had investors feeling bullish. In overseas news, China released GDP figures showing the economy continued to rebound from the pandemic slowdown, while the Eurozone’s composite PMI figures showed economic activity weakening in January. Overall, the S&P 500 added 2.00% on the week.
Housing Sizzles Despite Cooler Weather
The housing market remained strong in December, defying the historical trend of moderating buying activity during cooler seasons. Housing starts rose 5.80% to a seasonally adjusted annual rate of 1.669 million units, while permits for future homebuilding rose 4.50% to a rate of 1.709 million units in December. Single-family homebuilding, the largest share of the housing market, was particularly strong, soaring 12% to a seasonally adjusted annual rate of 1.338 million units. December marked the eighth consecutive increase in single-family starts. The existing home sales market also saw incredible demand, rising 22% from the year ago period. Sales for the full year hit 5.64 million units, their highest level since 2006. The rise came despite a 12.90% year-over-year increase in the median price of an existing home, which hit $309,800 to become the highest December median price on record. Prices continued to push higher due to limited inventory, with just 1.07 million homes for sale at the end of 2020. At the current sales pace, this represents just a 1.9-month supply and it is significantly below the six-to-seven months supply considered to be a healthy balance between supply and demand. Housing has been strong for quite some time but the pandemic has thrown the sector in to high gear, unlocking demand from buyers seeking more amenities and personal space while historically low interest rates have made purchasing a home more attractive.
China’s Economy Expands in 2020
China has managed to overcome its coronavirus-induced slump. Despite a 20% drop in industrial production and a 30% drop in retail and food services at the start of the pandemic, the economy ended the year on a strong note, growing 2.3%. China’s resurgence has been assisted by strong global demand for Chinese exports, particularly medical, electronic, and home furnishing goods, while domestic public works and infrastructure spending have supported the country’s industrial sector. China’s consumer demand has been slower to rebound but with COVID seemingly contained in China, and as vaccination expands, the Chinese economy appears poised for a stronger 2021.
Eurozone Struggles Amid Coronavirus Surge
Eurozone business activity took a hit once again amid tighter restrictions to contain the surge in coronavirus cases. The IHS Markit Flash Composite PMI fell to 47.5 in January, down from December’s 49.1. Numbers above 50 signal economic growth, while numbers below 50 signal contraction. The continued weakening was driven by forced closures of hospitality and entertainment venues which more than offset continued strength in the manufacturing sector. The latest figures further strengthen the case for a double-dip recession for the eurozone as tight restrictions look set to remain in place at least through mid-February in most of the economic bloc.
Although still early, earnings are off to a strong start. Of the 66 companies in the S&P 500 that have reported earnings to date, 87.9% have beat analyst expectations according to I/B/E/S data from Refinitiv. That’s above the long-term average of 65% and the prior four quarter average of 76%. Looking ahead to Q1 2021, earnings are forecast to rise 18.1% from a year ago. It should be noted that this is in comparison to a terrible Q1 2020, so the growth rate is not as impressive as it might otherwise seem. Still, optimism is the overwhelming emotion in the market presently, and there are reasons to be so. There is a strong possibility a massive stimulus bill will be passed which should juice the economy over the short-term, and interest rates remain incredibly low – converging at a time when economic activity begins to accelerate. It is hard not to believe markets will go higher when you’ve got monetary and fiscal stimulus and a load of pent-up demand. The overwhelming consensus on Wall Street is that since conditions will be better a year from now, you’ve got to buy the dips, but a lack of any sustained selling since April has yielded a complacency with valuations that, frankly, are not very attractive. So while markets probably continue to go higher from here, we’d differentiate that from us being bullish on why they might.