Stocks continued to rally in the first few weeks of 2021, only to fade in the last week of January. The financial markets ended the month with U.S. large cap stocks and bonds posting moderate losses for the month. U.S. small cap stocks and emerging markets stocks posted gains with low to mid-single digit returns. Considering the political environment, January marking the deadliest month of the coronavirus pandemic, new variants of the coronavirus emerging, and speculative trading activity from Reddit users, we believe the financial markets digested these events well. We are all familiar with the political uncertainty, both at the state and federal level, and the events at the Capitol Building in early January. The political realities facing America today are quite challenging. However, financial markets are looking through this difficult time in American history and focusing on fiscal relief from Washington. It is imperative that our political leaders foster a path toward fiscal compromise to help our citizens suffering from this pandemic and to restore economic vitality when this pandemic ends.
Economic recovery from the pandemic has been stronger than initially expected. After Gross Domestic Product (GDP) surged 33.4% in the 3rd quarter of 2020, it grew at an annual rate of 4% in the 4th quarter. While positive, the Federal Reserve recently commented that the pace of recovery has moderated, with weakness concentrated in sectors negatively impacted by the pandemic. Although homebuilding permits surged in December, it is expected surging lumber prices and labor shortages may slow this momentum. In addition, according to the Federal Reserve, the path of the economy is dependent on the course of the virus and progress with vaccinations. The latest positive clinical trial news from Johnson & Johnson and Novavax suggest help is on the way. This is an encouraging sign!
Recently, the financial markets have had to contend with speculative trading activity from a group of investors using the “WallStreetBets” chat room on the Reddit website. These investors, many utilizing the Robinhood app, have thwarted hedge fund bets on certain heavily shorted stocks, sending these stocks significantly higher. Ironically, this band of tech savvy investors is speculating in stocks with challenging growth prospects. Companies like GameStop, AMC Entertainment and Macy’s have seen their businesses ravaged by the pandemic and are struggling for their financial lives in a fast-changing world. While it is rare to see investment money flowing into companies with weakening fundamentals, this speculative trading is unexpectedly challenging the hedge fund industry. While we are concerned with this type of trading speculation, whether by Reddit traders or professional hedge fund managers, it appears to be limited to a narrow group of companies and does not suggest problems broadly for the stock market.
With aggressive and accommodative support by the Federal Reserve, fiscal support from Congress and continued expansion of vaccinations, we continue to see support for stronger economic recovery in the second half of 2021 and into 2022. Understandably, there may be inevitable ups and downs in this economic recovery. In addition, this may lead to increased market volatility and uneasiness from time to time. However, it is imperative to emphasize a long-term approach to investment and financial planning to navigate this pandemic and economic recovery. Our experienced team at 9258 Wealth Management is here to serve you in these challenging times in order to offer you financial, tax, business, and investment planning and advice.
The pandemic may have altered the way we communicate with many of you. However, we are a phone call, email, or video chat away from connecting with you! Please feel free to contact us at 513.791.9258 (Blue Ash) or 513.863.4015 (Hamilton) or inquire about setting up a video call. We look forward to engaging with you again, and as always, thank you for your business and support.