Stocks took a breather last week, closing down more than 1% after posting record highs the week prior. Wells Fargo and JP Morgan released earnings last week, kicking off what promises to be an eventful earnings season.
United States
The major benchmarks finished the week mixed, but not before all but the S&P 500 Index hit record intraday highs on Thursday. Energy stocks pulled back sharply at the end of the week but led gains within the S&P 500, helped by a surprisingly large drawdown in domestic oil inventories. Communication services shares underperformed after social media companies Twitter and Facebook announced bans of President Donald Trump and others on their platforms, citing concerns over the incitement of violence. Information technology shares were also weak, due, in part, to poor performance by payments processors. Small-caps outpaced large-caps, and value shares outperformed growth stocks, helping both building on their leads to start 2021.
On Thursday evening, the incoming president announced his plans for USD 1.9 trillion of stimulus, although it appeared to contain few market-moving surprises. Questions also remained about how quickly the incoming administration could move on the plan and how much Republican opposition would slow or reduce the package. Without sufficient Republican support in the Senate, Democrats will have to rely on the so-called reconciliation process, which places limits on the types of spending that can be increased.
The retail sales data seemed to push Treasury yields lower on Friday, but long-term yields increased modestly through most of the week, supported by stimulus plans and dovish comments from Federal Reserve Chair Jerome Powell. (Bond prices and yields move in opposite directions.) The Fed Chair affirmed that the central bank has no plans to raise interest rates anytime soon and would first need to see inflation remain above 2% for some time. The municipal market was supported by low issuance, reinvestment of January coupon payments, and the prospect of more federal aid to state and local governments under a Biden administration.
Europe
Shares in Europe fell as the resurgence in coronavirus infections dented optimism surrounding plans for further fiscal stimulus in the U.S. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.81% lower, while Germany’s Xetra DAX Index declined 1.86%, France’s CAC 40 lost 1.67%, and Italy’s FTSE MIB slipped 1.81%. The UK’s FTSE 100 Index slid 2.00%, pulled down by data showing that the economy shrank in November due to the imposition of a stricter lockdown.
German gross domestic product (GDP) contracted by a smaller-than-forecast 5.0% in 2020 as coronavirus restrictions curtailed activity, preliminary data showed. A wave of recovery and stimulus measures during the year helped support the economy. Growth probably stagnated in the fourth quarter, the statistics office said.
In November, the UK economy suffered a monthly decline of 2.6%—the first such contraction since a slump in April 2020. The smaller-than-expected decline was led by the services sector, as a new lockdown hit pubs, restaurants, nonessential shops, and other consumer services businesses. The UK’s official data agency said businesses were adjusting better to the lockdown rules and schools had remained open that month. Bank of England Governor Andrew Bailey said it was too soon to say if more stimulus would be needed in the UK after the central bank increased its bond-buying program to almost GBP 900 billion in November.
Asia
Chinese stocks fell as the U.S. added another nine Chinese companies to its investment blacklist on Thursday, taking the total to 44 names that the Trump administration claims have ties to China’s military. For the week, the country’s large-cap CSI 300 Index declined 1.4% and the Shanghai Stock Exchange Composite Index shed 0.6%, according to Reuters. Shares of Chinese internet leaders Alibaba and Tencent were volatile on reports that they too would be added to the U.S. blacklist, though this had yet to happen by Friday. Shares of Xiaomi, a well-known domestic consumer electronics and smartphone maker, fell sharply on its unexpected addition to the list. Banks, however, rose following strong fourth-quarter earnings. The yield on China’s 10-year sovereign bond yield declined and ended the week at 3.15% despite further signs of economic recovery. The yuan currency ended the week flat against the U.S. dollar at 6.47 per dollar.
Japanese stocks generated mixed performance for the week. The Nikkei 225 Stock Average advanced 1.4% (380 points) and closed at 28,519.18 recording another multidecade weekly closing high. The large-cap TOPIX Index was about flat, however, and the TOPIX Small Index declined. The yen was little changed for the week and closed near JPY 104 versus the U.S. dollar
Loosened government lending policies and financial support during the pandemic contributed to the lowest number of Japanese corporate bankruptcies in 31 years, according to Tokyo Shoko Research, a credit research company. Business failures of companies with at least JPY 10 billion of debt declined to 7,772 in 2020, marking the lowest number of bankruptcies since 1989.
Other Key Markets:
- Turkey – Turkish stocks, as measured by the BIST-100 Index, returned about -1.0%. T. Rowe Price sovereign analyst Peter Botoucharov has been reviewing the latest macroeconomic data from Turkey and notes that the country’s external account situation remains weak. For example, Turkey had a current account deficit of USD 35 billion for the period from January through November 2020. Botoucharov projects that the full-year 2020 deficit will be about 4.5% to 5.0% of the country’s GDP, which is comparable to what it was in the 2017–2018 timeframe.
- Brazil – Brazilian stocks, as measured by the Bovespa Index, returned about -3.7%. News that Brazilian inflation finished 2020 at 4.5%—a four-year high, as reported by Reuters—weighed on Brazilian assets. Equities fell sharply on Friday amid news of an unexpected drop in retail sales in November 2020.
