Watch the CPK Market Action Report: February 2021
Stocks gained early momentum as a fortified U.S. capital provides a peaceful transition of Presidential power. Will a pending 2nd impeachment of a former President, struggling economy, slow vaccination rollout or fears over new strains of Covid-19 hitting our shores have any impact on the markets ability to forge higher?
Watch the full 3-minute Market Action Report now:
February 2021
Stocks gained early momentum as a fortified U.S. capital provides a peaceful transition of Presidential power. Will a pending 2nd impeachment of a former President, struggling economy, slow vaccination rollout or fears over new strains of Covid-19 hitting our shores have any impact on the market’s ability to forge higher?
That action starts, NOW!
Index Performance Recap
After a month that included a riot at the White House and a short squeeze on institutional investors, stocks finished mixed posting their worst month since October. The Dow Jones Industrial was down 2.04% and the S&P 500 was down 1.11%. However, the Nasdaq Composite was able to finish up 1.42%.
EQUITY UPDATE
The SKEW Index, released by the CBOE, shows the risk of a "black swan" type of
event in equities within the next 30 days. It shows the risk of a swift, sharp drop in
equities as determined by options traders in the S&P 500 index. In December, the SKEW was near 150. The last few times we had readings near 150, we saw big pullbacks, corrections, or bear markets. While a pullback is not guaranteed, our models are well positioned if one may come.
BOND UPDATE
Although bond yields have climbed in recent months, the 10yr is currently around 1.07%. This is well below what we see as a fair value of about 2.9%. For Treasury yields to move sharply higher, global yields will need to rise along with Treasuries. This supports our view that bonds remain fully valued compared to stocks. However, rising yields are a direct headwind on market multiples which would negatively impact stocks. As such, higher yields remain the biggest threat to the current multi-month rally.
COMMODITY UPDATE
If oil producers remain committed to recent production cuts and demand continues to rise as it has since the turn of the year, we could see oil approach and possibly test 52-week highs in the weeks ahead. Gold’s long-term trend remains bullish. However, the near term is neutral as we could see additional weakness if the dollar strengthens. If the longer-term downward trend of the dollar continues and stimulus-fueled growth along with inflation expectations are maintained, metals should be able to trend higher well into 2021.
CURRENCY UPDATE
The dollar continues to chop sideways. Until the market becomes convinced the EU or UK are more committed to additional future stimulus than the U.S., it is going to be very hard for the dollar to mount a sustainable rally. This will bode well for stocks.
ECONOMIC UPDATE
The Federal Reserve continued their dovish stance in their most recent comments centered around more accommodation. This means that until the economy recovers, a bubble forms or inflation becomes a real issue the story for stocks will be very positive. Fourth quarter GDP results were up 4%.
GEOPOLOITCAL UPDATE
After a peaceful transition of presidential power, Democratic House Leader Nancy Pelosi has submitted articles of impeachment to the Senate. Although the trial is not to start until late February, the effort may be futile as Democrats would need to secure a vote “to impeach” from seventeen Republicans and early signs show that might not be plausible.
Senator Chuck Schumer said Congress is aiming to get the next round of stimulus passed in a “month to month and a half.”
THE WRAP
The number one risk to the market right now is investor complacency. That complacency could be shaken if the short squeeze initiated by retail investors pushes large hedge funds into a forced liquidation that would impact the broader market.
Although we may see some choppiness or worse yet, a fast and scary 10-20% air pocket, the four main pillars of this rally including historic FOMC stimulus, huge Federal stimulus, vaccine optimism and no double dip recession remain intact. All of this will most likely take a very long time to burn off leaving investors with a sustained buying opportunity.
CPK FOCUS
So, for the month of February, our models currently hold a 35% cash allocation. Our broad focus is on both domestic and international equities.
Domestically, our attention is on Small Cap and Mid Cap Growth with favored sectors of Technology, Consumer Cyclical, Energy, Industrial, Basic Materials and Healthcare.
As for International Equities, our attention in on Asia Pacific Developed and European Developed markets.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
THE PITCH
If you do not have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the February 2021 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!