Developed Markets Flat
In the month of January, international developed stock markets fell by 1.07%. The UK and Pacific ex Japan recorded returns of -0.24% and 0.70%, respectively. The U.S. equity market started the year down 0.96%. In 2021, investors will continue to monitor COVID-19 vaccination progress and any normalization of economic activity. Financial markets will be supported by ongoing easy monetary policy and the potential for further fiscal stimulus across the globe.
Chinese Market Jumps in January
Broader emerging markets posted a 3.27% return for the month, building on the strong performance in the fourth quarter of 2020. China and Korea recorded returns of 7.36% and 1.18%, respectively. Brazil and Mexico lagged other markets in January. Asian emerging markets remain the primary driver of strong emerging market returns. The implementation and enforcement of proper COVID-19 safety measures has helped many Asian countries increase business activity, which is approaching pre-COVID levels.
Energy and Telecommunications Outperform
Energy and telecommunications recorded returns of 2.51% and 0.82%, respectively, in January. Consumer staples and industrials lagged other sectors. Sectors with low valuations may be positioned for future outperformance. The energy sector, after a difficult ten-year period and a disastrous 2020, may benefit from an increasingly favorable supply/demand picture. Recovery in oil demand is dependent upon vaccination progress, but OPEC also proactively decided to curb production through March of this year.
In January, value outperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of 0.18%. Small-cap stocks started the year strongly, returning approximately 5% for the month. Relative valuations between value stocks and growth stocks are still near historical highs based on many different valuation metrics. Growth stocks have held up much better than more economically-sensitive value stocks, but their future earnings may not justify the higher valuations.
Emerging Market Small-Cap Stocks Flat
In the international developed markets, value outperformed growth in the large-cap space but underperformed in the small-cap space. Momentum recorded a return of -0.97% while small-cap emerging market stocks posted a return of -0.31% this month. Foreign momentum strategies have performed well in the short-term and over the past ten years.
Interest Rates to Remain Low
In January, the three-month Treasury bill index returned 0.01% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve indicated they will keep interest rates at current levels until inflation picks up. Savers may face low rates for a long period of time, which will negatively impact retirees and people close to retirement. Real yields, meaning yields adjusted for inflation, are in negative territory. The CPI decreased by -0.98% in 2020.
Fixed Income Mixed in January
The returns of deflationary hedges were mixed for the month. Long-term government bonds returned -3.56% in January after long-term rates inched up. The Bloomberg Barclays U.S. Agg Bond Index returned -0.72% in January. Short-term municipal bonds and long-term municipal bonds started the year strong. Real yields on many fixed income investments, including the investment-grade corporate bond universe, are negative or close to 0%.
Crude Oil Rallies
Inflation-sensitive investment returns were mixed for the month. WTI crude oil and the Alerian MLP were up 7.35% and 5.84%, respectively. Domestic and foreign REITs continued to struggle after a tough 2020. Gold bullion and gold miners were flat, but ongoing large fiscal deficits, high debt levels, and easy monetary policy may create tailwinds in the coming years.
U.S. Dollar Depreciating
Over the past three months, the U.S. dollar depreciated against most other major currencies. The U.S. dollar depreciated against the British Pound, the Mexican Peso, and the Australian dollar the most. The Japanese Yen was flat against the U.S. dollar. The continuation of large U.S. fiscal deficits may weigh on the U.S. dollar in the medium-term to long-term.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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