2020 was a year filled with uncertainty and chaos, but the stock market ended the year on a bright note. Major indices hit all-time highs before retreating slightly to close out December, and leave investors feeling confident heading into 2021. The beginning stages of a coronavirus vaccine rollout furthered the belief that the pandemic is coming to its ending stages. The Nasdaq continued to outperform other major indices, rising about 3.5% on the month, while both the S&P 500 and Dow Jones were up close to 2%. As the year came to a close, the Nasdaq rose a whopping 40%, S&P 500 was higher by 16%, and the Dow grew by 7% to close 2020.
Source: https://finance.yahoo.com/chart/%5EDJI
US dollar weakening
One area for investors to look out for is a weaking US dollar which could lead to an increase in inflation. In 2020 alone, the US money supply went from $15 trillion to over $19 trillion, the largest increase in money supply ever recorded, and a more than 25% increase in the US money supply in just one year. This is likely the cause for a weaking dollar over the year. In December, the US dollar index fell to its lowest level since April, 2018, and overall, the nation’s currency fell more than 6% on the year. This caused foreign exchange rates to adjust as a result. The exchange rate for the Great British pound to the dollar rose to 1.3866, its highest level since 2018.
Another factor weighing on the dollar is the Fed’s decision to keep interest rates low to support a full economic recovery. With the Fed trying to keep economic growth afloat, they have created an economic environment where the dollar could fall further. The Fed has made it clear they are open to allowing inflation to rise while keeping rates suppressed, so even an uptick in prices won’t likely cause rates to change.
Source: https://fred.stlouisfed.org/series/M2
US labor force remains weak
In the spring it was hoped that the jobs lost due to the coronavirus would be temporary, and most laid-off employees would return to the workforce in only a few months. Unfortunately, this hasn’t been the case. The labor force participation rate — a measure of the nation’s active workforce — hit a bottom in April at 60.2%. And while it was hoped labor participation would quickly rebound, that hasn’t been the case. The reported November number of 61.5% is still significantly lower than any other year in the past decade outside of 2020.
This should give some context to the reported 6.7% unemployment rate in November, which might look positive, but is hurt by the previously mentioned drop in labor force. Unemployment numbers often overshadow labor force statistics, but the two feed off one another. If people are not entering the labor force, they aren’t counted against unemployment numbers since it appears as though they aren’t looking for work. However, many who opt out of the labor force do so after months of unsuccessfully trying to find employment. This has led the unemployment rate to remain suppressed, even as more Americans find themselves out of work.
Source: https://data.bls.gov/timeseries/LNS11300000
Wages recovering as states head to higher minimum wages
Recognizing the continued income disparity across the nation, US states are taking wage matters in their own hands. Half of US states will raise their minimum wage starting in 2021 in an attempt to provide living wages to all employees. The Federal hourly minimum wage still remains at $7.25, but there is a big push for President-elect Joe Biden to raise that minimum during his term in office, something that he has previously mentioned is on his agenda.
Source: https://www.cnbc.com/2020/12/30/half-of-us-states-will-raise-their-minimum-wage-in-2021.html
Meanwhile, current wage statistics are showing promise. After no change in October, real average hourly earnings rose by 0.1% in November, seasonally adjusted. Additionally, a report published by University of Georgia mathematics professor Dr. Robb Sinn showed that Americans have seen their best wage growth in 40-years under President Donald Trump. And this isn’t just for the wealthy, Sinn displays how minorities and low-wage workers experienced significant wage growth that outpaced previous administrations.
New stimulus package passed at 11th-hour
The clock was ticking on Congress to pass another relief package for the American people, and it came down to the wire, but the new stimulus package was finally passed. All told, the $900 billion bill has provisions to help small businesses, checks to individuals, and financial aid to support the roll-out of the coronavirus vaccine. Here are the highlights of the package:
- Stimulus checks – $600 per individual making less than $75,000 per year, and $600 per child
- Unemployment benefits – Added benefits of $300 per week
- Education – $82 billion for education, including $54 billion for K-12 schools and $23 billion for higher education institutions
- High-speed internet – $7 billion for expanding access to high-speed internet, with $50 per month for low-income families to pay their internet bill
- Small businesses – A new round of Paycheck Protection Program loans totaling $285 billion, with $12 billion specifically for minority-owned businesses
- Public health – $20 billion allocated to vaccine purchases, $20 billion for the continuation of testing and contact tracing, and $8 billion for vaccine distribution
- Climate change – $35 billion to fund solar, wind, and other clean energy projects
The strength of China’s economy is expected to continue. According to a survey of global CFO’s, there is a more positive outlook for the growth prospects of China’s economy than the United States. A growing middle class in the country is leading to surging retail sales and could make China the world’s top consumer goods market in the coming years.
China’s growth is slowing
Source: https://www.bloomberg.com/news/articles/2020-12-31/china-factory-outlook-eases-as-growth-recovery-stabilizes
The quick Chinese economic recovery is losing steam. Economic indicators point to a nation that could be past the height of recovery and is beginning to stabilize. China’s purchasing managers’ index (PMI), a key measure of manufacturing, fell to 51.9 in December from 52.1 last month. This is also less than the median estimate of 52 which economists had expected. Bo Zhuang, chief China economist at TS Lombard, said, “We have passed the peak of the strong recovery, as suggested by exports and industrial shortages. I think the PMI from here might be peaking as the credit growth is peaking out.”
Still, estimates put Chinese GDP growth at 9% for 2021, well above the 4.2% expected growth in the United States. If China’s economy continues to outpace the US, economists believe that the eastern nation will overtake the American economy as the world’s largest in 2028, five years earlier than previous estimates.
Articles We’re Reading
How the Economy Is Actually Doing, in 9 Charts … (link)
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Nobel laureate Paul Krugman predicts a swift, sustained economic recovery once vaccines are rolled out … (link)
Market Snapshot
For the Month Ending 12/31/2020 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
The origins of money
The dollar bills that we use today got their start around 770 B.C. when the Chinese created a system of paper money. But for thousands of years before paper currency was introduced, other forms of currency existed. You likely know some of these currencies, like gold and silver, but did you know that other forms of unlikely currency also existed? Currencies needed to be easily transported, stored, and traded, and these properties influenced what was used for currency in early civilizations. Some forms of early currency included animal skins, salt, shells, tools, and even weapons. That’s a far cry from the dollar bills and credit cards that we use today!
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Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.
