Jan. 11-15, 2021

What happened last week

Markets dipped, as investors focused on U.S. political developments

North America’s benchmark stock exchanges struggled to hold onto their year-to-date gains, with investors “hitting the pause button” on the recent record-breaking rallies. This was largely due to the dramatic transition of power in the U.S., which continued to unfold and dominate headlines.

Sector rotation remained a key theme. Equity investors continued to shift money from technology stocks back into the energy, industrial and financial sectors, which stand to gain the most from economies reopening from pandemic lockdowns. Shares of social-media companies struggled, mid-week, as moves to restrict President Donald Trump’s activity raised concerns about freedom of expression, and how rules and regulations should be appropriately enforced on social platforms. This, in turn, sparked calls for more government regulation of “big tech” companies.

President-elect Biden announced a stimulus plan just shy of $2 trillion

Investor expectations for further fiscal stimulus (under a Biden presidency and a Democrat-controlled Congress) have fuelled North American equity markets in recent weeks, while helping to boost U.S. Treasury yields. In a televised address on Thursday evening, details of the much-anticipated economic-relief package were revealed by the president-elect. The US$1.9-trillion package includes proposals for stimulus cheques – in the amount of US$1,400 – to be sent directly to Americans (this in addition to the US$600 payments recently approved by lawmakers); a doubling of the minimum wage; enhanced unemployment benefits; and billions of dollars in funding to contain COVID-19 and accelerate the pace of vaccinations. The incoming Biden administration plans to work with Congress on approving the package immediately after taking office.

Earlier in the week, the Democratic majority in the House of Representatives, along with 10 Republicans, voted to impeach President Trump – on the grounds of inciting an insurrection, on Jan. 6, that led to deadly rioting at the U.S. Capitol. President-elect Biden acknowledged the distraction that the process could pose to executing his agenda, but he appeared determined that Congress should proceed. In an official statement, he said: “I hope that the Senate leadership will find a way to deal with their Constitutional responsibilities on impeachment while also working on the other urgent business of this nation.” Uncertainty about the impact this situation will have on the passage of the president-elect’s economic relief package, weighed down U.S. equities on Friday, with investors preferring the relative safety of Treasuries and the U.S. dollar.

The Fed chair confirmed that accommodative monetary policy will continue

On Thursday, in an online interview organized by Princeton University, U.S. Federal Reserve (the Fed) Chairman Jerome Powell said that an interest-rate hike will not be coming anytime soon; he also quelled investor concerns over the possibility of the U.S. central bank scaling back its bond-purchasing program later this year. In December 2020, the Fed pledged to continue making US$120 billion in monthly purchases of treasuries and mortgage-backed securities, until there’s “substantial further progress” toward employment and inflation goals. But, while COVID-19 vaccine rollouts have fuelled hope for a stronger-than-expected recovery in recent weeks, some analysts have speculated that policymakers could start reducing bond purchases later this year. Powell responded: “We know we need to be very careful in communicating about asset purchases… Now is not the time to be talking about exit.”

The stock and bond market*
S&P/TSX Composite 17,909.03 -0.74% 2.73%
Dow Jones Industrial Avg. 30,814.26 -0.91% 0.68%
S&P 500 Index 3,768.25 -1.48% 0.32%
NASDAQ Composite 12,998.50 -1.54% 0.86%
10-yr GoC Yield 0.81% 0.0% 0.14%
10-yr U.S. Treasury Yield 1.11% -0.02% 0.18%
WTI Crude Oil (US$/bbl) 52.36 0.23% 7.91%
Canadian Dollar US$0.7857 -0.18% 0.04%
Bank of Canada Prime Rate 2.45%

*Weekly performance ending Jan. 15, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.

What’s ahead

New leadership over the U.S. economy This Wednesday, Joe Biden will be sworn in as the 46th President of the United States. The Democratic Party will have control of the White House as well as the two houses of Congress. Janet Yellen – who will become the first woman to serve as Secretary of the Treasury – is expected to champion “extraordinary fiscal support” to help the economy, according to Bloomberg.

An update on Canadian monetary policy Also happening on Wednesday, the Bank of Canada will announce an interest-rate decision. In its last update, the central bank held its benchmark interest rate at 0.25%, while renewing its pledge to keep rates in check until the economy has fully recovered.

Circle these dates

  • Jan. 26-27: U.S. Federal Reserve meetings and statement
  • Feb. 15: North American markets closed for holidays
  • Apr. 30: Deadline for 2020 income-tax filing

Key take-away

Focus on the future. If your investment goals, risk tolerance and time horizon haven’t changed, you’re likely on the right track. Try to look past any short-term ups or downs and focus on the long-term prospects.

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