Following a strong close to 2020 with U.S. equity markets posting new all-time highs, market participants will be watching how well that momentum carries into the new year, which will kick off with an eventful week headlined by the Georgia run-off elections that will determine control of the Senate. The S&P 500 capped off a strong year with a 1.5% gain last week, bringing its total return on the year to 18.4%, including dividends, despite the first quarter turbulence in which the index drew down -34% off its high at its lowest point. Meanwhile, the tech-laden, growth-oriented Nasdaq Composite soared 44.9% on the year, and the more cyclically sensitive Dow Jones Industrial Average posted a lower but still solid return of 9.7%.
So far, equity markets have stumbled out of the gate in 2021 amid the political uncertainty and elevated coronavirus concerns as hospitalizations in the U.S. hit a record on Sunday and several European nations are extending lockdowns. The initial vaccine rollout in the U.S. has also hit some snags with only 4.2 million doses administered before year-end, falling short of the 20 million target, according to the CDC. However, the vaccine rollout has started to gain traction as the pace has increased to about 500 thousand doses delivered per day recently, per Dr. Anthony Fauci.
One of the largest tailwinds to stock markets in 2020 was falling interest rates as the U.S. 10-year Treasury yield finished at 0.92% after starting the year at 1.92%. Although falling interest rates indicate weaker expectations for economic growth, they can provide a boost to stocks by increasing the present value of future cash flows, decreasing corporate interest payments, and increasing demand for equities relative to less attractive fixed income yields. As a result, the path of rates will be watched closely as the economy recovers from the pandemic and governments globally have taken on significant debt burdens to combat the crisis with the potential for more stimulus yet to come.
Amid that backdrop, all eyes are on the Georgia Senate elections taking place today as the results have a range of possible implications for financial markets, including the potential to shape inflation and interest rate expectations. Some market participants anticipate that inflation and interest rates could trend higher under Democratic control of Congress as a result of a greater stimulus and government spending push and a consequent increase in government debt issuance. Additionally, among the other direct considerations stemming from the votes are the likelihood for future tax increases, the path of regulation across numerous industries, and the prospects of greater infrastructure spending. The election outcome may take several days to be announced as officials tally the results.
On the economic front, the week ahead will provide an updated picture on the health of the manufacturing and service sectors as well as the U.S. labor market with the monthly employment report due out on Friday. Economists anticipate that limited improvement in the labor market occurred during the month of December with a consensus forecast of 110k nonfarm payrolls added and a 6.8% unemployment rate, compared to 6.7% in November. Although the start of the 2021 is set to be an eventful one with several potentially market moving developments, the U.S. economy as a whole continues to demonstrate its resilience in the face of disruption and we recommend maintaining the course with a long-term investment perspective. As always we will keep you apprised of market and economic developments and our thoughts.
