OVERVIEW
The move into more peaceful political times came to an abrupt end with the January 6th storming of the Capitol by protesters challenging the election results. Then, two weeks later, on inauguration day, President Biden signed a record number of executive orders seeking to rollback former President Trump’s initiatives, in particular on energy and immigration; so much for the moderation and unification. While political emotions remained heated in the media, the financial markets focused on robust economic news that rolled in throughout the month. The underlying fundamental strength of the economy coming into 2021 was evident in spades. Early in the month, manufacturing readings for December hit 7-year highs with “new orders” signaling continuing strength for the next 90 days. The services sector reading for December came in at very strong levels and significantly exceeded November’s strong number and analysts’ estimates. The December Credit Managers Index showed lenders were bullish on the economy and willing to extend credit. Later in the month, more bullish manufacturing news came from various regional Fed reports about January activity and December’s Durable Goods (Cap-Ex) report which showed a strong second surge up in activity to +11.1% year over year. The darling of last year’s economy, housing, continued its run of powerful results with December year over year New Home Sales +15.2%, Permits +17.3% and Pending Home Sales +21.4%. Meanwhile, the inventory of new and existing homes for sale relative to the sales rate remained at historic lows, thereby increasing the likelihood for continued new construction. While there were some negative headlines about a big jump in Weekly Jobless Claims which helped set the market back for a week, that news was quickly jumped on by the administration as evidence of the need for a new stimulus plan. The financial markets cheered the likelihood of a new $1.9 trillion infusion into the economy. Overseas saw a mixed bag of economic news with Emerging Market Countries China, India and Brazil exhibiting strong economic numbers, while the Eurozone was showing some renewed slowdown from restrictions to deal with the virus.
The S&P 500 ended the last week of the month with a big sell-off down -3.31% which dragged down all other equity markets and asset classes. Presumably this was fallout from the trading on Robinhood by retail investors causing a short squeeze on hedge funds. For the month, Emerging Market Equities were positive against a negative S&P 500. Also, Foreign and US Small Caps outperformed Large Caps.
Bonds seemed to confirm that the selloff in the S&P 500 was more of an anomaly, in that Credit (economically sensitive) Bonds outperformed Interest. Interest Bonds declined as rates rose, which was also a sign of strength in the economy.
Commodities were mixed with Energy, Agriculture and Silver up, while Gold and Industrial Metals were down.
January 2021
Monthly Commentary
PERFORMANCE
TAG TACTICAL STRATEGIES: Global Macro
The core strategies all outperformed their proxies with Tactical Moderate and Tactical Growth posting fractionally positive returns against their proxies’ fractional losses. Performance was driven by over-weights to Emerging Market, Foreign Developed and US Small Cap Equities.
Tactical Income’s positive return was driven by its Credit positions, primarily the Pipelines which benefitted from the rally in Energy.
Tactical Equity outperformed its proxies with a positive return against their losses. Performance was led by Emerging Market Internet and South Korea, US Internet, Biotech and Pharma and US Homebuilders.
RPg STRATEGIES: Quantitative Formula
Tactical US Equity outperformed its proxies from positions in Technology/Internet sectors, Healthcare and Energy. Tactical US Equity FT outperformed its proxies with a positive return from similar sector allocations and its Small/Mid Cap bias.
Tactical Global Balanced outperformed its proxies with a fractional positive return against their fractional losses due to allocations in Emerging Markets, Energy and its Small/Mid Cap bias.
OUTLOOK
As we suspected, the politics around the virus continues. Despite the politics of masks, lockdowns, moving averages and testing, the virus has proved to be “an efficient spreader; it is not going to be stopped, as much as politics resists the idea of realities that can’t be changed by politics” (Holman Jenkins, Jr., WSJ 2/6/21). What is concrete and much less susceptible to debate are trends in hospitalizations and deaths. Toward that end, the WSJ reports on 2/6/21 that new cases are down -30% from two weeks ago and hospitalizations are down -19%. This is similar to a study by Goldman Sachs on 1/19/21 showing hospitalizations were down -7% in the preceding 12 days versus prior trend which would have suggested up 12%. The WSJ also reports that new cases in nursing homes had a steep drop from the previous week and it was the fifth consecutive weekly decline. The difference maker in all these statistics is attributed to the vaccinations that began in late December. That is even more so because of who received the vaccinations; the elderly and populations in long term care facilities, which is also the population with the greatest number of comorbidities. As we have reported in many of our Commentaries, this is the same demographic that accounted for the overwhelming majority of hospitalizations and deaths.
All of that is leading to a realization of the need for a shift in virus mitigation strategy– one tightly focused on the truly at risk and not the general population. Dr Marty Makary of Johns Hopkins University stated on 1/14/21 that he expects a massive deceleration of cases and hospitalizations by April due to natural and vaccination herd immunity (see our 12/17/21 Special Market Commentary, The Race To Herd Immunity for a definition of that term). Accordingly, at that point he recommends masks for selective application if you are at some special risk. On 1/27/21, Dr. Joneigh Khaldum, Mich. Chief Medical Executive suggested it is still safest for elderly people or people with underlying medical conditions to avoid eating indoors.
As the foregoing receives more widespread attention, we expect investors to begin to price in a more rapid reopening of the economy and even stronger economic growth.
Which brings us to the Democratic push for the new $1.9 billion relief bill. Based upon the current and projected strength of the economy we discussed in the OVERVIEW and the fact that the lingering unemployment is due primarily to government-imposed restrictions, not a lack of demand, do we need a massive stimulus? Unfortunately, the politics are in large part driving the push for this package; $130 billion would go to public schools and $350 billion to state and local governments. Therefore, we believe this stimulus will greatly increase the odds for a more rapid increase in inflation, which was one of the risks we cited in our 1/12/21 Financial Market Outlook – 2021.
Accordingly, the TAG and RPg strategies remain allocated to a stronger than expected growth outlook with building inflationary pressures.
We welcome your comments on the foregoing.
Please direct them to support@riskparadigmgroup.com
Important Disclosures:
Risk Paradigm Group, LLC (RPg Asset Management or RPg) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). Tactical Allocation Group (TAG) joined Risk Paradigm Group, LLC and became a division of the firm on July 22, 2016. Additional information regarding Risk Paradigm Group, LLC can be found on our website at www.rpgassetmanagement.com. RPg does not provide tax or legal advice. Please consult an independent tax advisor for additional guidance.
This material has been prepared solely for informational purposes and is not to be considered investment advice or a solicitation for investment. Performance provided is past performance. Past performance is not indicative of future results. Investments may increase or decrease in value and are subject to a risk of loss. As with any investment strategy, there is potential for profit as well as the possibility of loss. No representation or warranty is made that any returns indicated will be achieved. Investors should consult their financial advisor before investing.
Any projections, market outlooks, estimates or expectations of future financial or economic performance of the markets in general are forward-looking statements and are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Actual results or events may differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Information contained herein is as of the period indicated and is subject to change. Any views expressed herein are those of the author(s) at the time of writing and are subject to change without notice.
The information contained herein includes information obtained from sources believed to be reliable, but we do not warrant or guarantee the timeliness or accuracy of the information as it has not been independently verified. It is made available on an “as is” basis without warranty.
This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from RPg. RPg reserves the right at any time, and without notice, to change, amend, or cease publication of the information contained herein. RPg may change any exposures and compositions reflected herein at any time and in any manner in response to market conditions or other factors without prior notice.
References to Indexes: The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the equity performance of larger companies in the U.S. Please note that an investor cannot invest directly into an index.
Risk Disclosures: Concentration, volatility, and other risk characteristics of a client’s account also may differ from the information shown herein. There is no guarantee that any client will achieve performance similar to, or better than, the strategy mentioned herein.
Sources: Bloomberg.
For more information, including risks of investing in our strategies, visit our website at www.rpgassetmanagement.com.