Market update – 6th January 2021

6th January 2021

Not only have global equity markets started the year in an exuberant mood, but the FTSE-100 has literally leapt out of the starter gates this week (as we write, the FTSE-100 is up just over 3% today, taking its gain so far this week to 5.50%).

Obviously one may think that the market is throwing caution to the wind given US politics; rising Middle-East tensions and the coronavirus’ Christmas holiday repercussions have all dominated the news headlines this week, but as we have been saying for the past 10 months, sometimes what appears to be an obvious investment conclusion on the surface, is actually the wrong conclusion.

Yes, these are obvious worries.  For example, the extension and intensifying of coronavirus lockdowns, not just in the UK, but across the world (with Japan poised to declare a state of emergency) is highly likely to have a short-term impact on the economic recovery.  Also, Donald Trump exerted pressure on officials in Georgia to find enough votes to change November’s Presidential election result; and after seizing another oil tanker in the Straits of Hormuz, Iran said it would increase its nuclear capabilities which adds to the uncertainty.

However, these are short-term issues – and in the case of coronavirus, the roll-out of both the Pfizer and AstraZeneca vaccine will ensure a return to normality is not too far away.

Additionally, as we stated in our last Weekly Market Update (please see here), this week’s run-off Senate elections in the state of Georgia is important as it determines which party will control the Senate – and it is currently looking as though it is going the Democrats’ way.

As such this is likely to result in a much bigger fiscal stimulus package to help those American households and businesses that have been hard-hit by the coronavirus outbreak and associated lockdowns – which greatly improves the outlook for the economic recovery, not just in the US, but globally (as the US is the world’s largest economy), especially when combined with a vaccine roll-out.

Adding to this optimism was the stunning US ISM (Institute for Supply Management) data, which clearly indicates that the US economy is still recovering strongly despite the surge in coronavirus cases.  Not only did the manufacturing reading pick up to 60.7 (well above both November’s reading of 57.5 and estimates of 56.8), but new orders rose to 67.9 from 65.1, while employment rose to 51.5 from 48.4.  50 is the line separating expansion and contraction, so not only do these readings show that the US economy continues to expand, but more importantly, the expansion is accelerating – which also bodes well for Friday’s US employment data.

In the UK, December’s PMI reading was revised up from 57.3 to 57.5 – its best reading since November 2013, while the high street clothing retailer Next, said on Tuesday (5 January 2020) that it had a much better-than-expected Christmas trading period – and this coupled with the FTSE-100’s large exposure to oil and commodities stocks (which will benefit from an economic recovery) have all helped the FTSE-100 outperform its global peers.

Investment Management Team