Equity markets set new record highs this week, with some stronger data out of China and positive earnings news demonstrating corporate resilience in the face of ongoing economic woes. Treasury yields remain stable, as investors balance the prospect of growth ahead with still troublingly high COVID infections and deaths around the globe. On the vaccine front, the rollout remains slow and sporadic, but additional funding and coordination should ramp up distribution rapidly in the coming weeks, with investors’ hopes tied to the success against the virus. One source of potential strength for stocks remains corporate buybacks, with companies sitting on significant cash stockpiles looking for ways to deploy their capital. From an economic perspective, data in the US showed a mildly positive reading this week, with unemployment claims dropping slightly, and homebuilder figures mixed. Earnings for fourth quarter have thus far exceeded estimates for the overwhelming majority of companies.
One of the major themes we continue to examine and see as an opportunity are the rapidly evolving relationships across the global economy, with a particular focus on the US and China. The world is increasingly becoming bi-polar between these great powers, as both sides push to decouple from one another directly and they compete for economic and technological supremacy. This special relationship will likely continue to remain fragile, as China has emerged from the COVID crisis stronger and looking to foster closer relationships that will cement it’s place on the world stage. Frictions will likely remain high, but we believe there are significant opportunities in China that investors should add to their portfolios, to harness global growth and further diversify their exposures. It is now projected that China will become the largest economy in the world by 2028 due to the significant rebound from the COVID shutdown, with exports fueling their growth. However, additional due diligence is required and a very active, selective approach should be taken to reduce the risks associated with the Chinese investing environment. High debt levels, currency volatility, and US-Chinese conflicts are but a few of the potential headaches investors face, but we believe long-term the risks will be rewarded with upside for portfolios.
We have continued to trim equity exposure overall as markets push to new highs, and risk assets look overly assertive despite significant challenges ahead in the coming months. We believe that the vaccine rollout and reopening of the economy will not occur in a smooth fashion, and that the probability of a setback is high, while stocks are priced to perfection. While our conviction remains high that the economy will come back to life this year and markets will end higher than current levels, short-term frothiness remains, in our view. The relative attractiveness of equities, despite high absolute valuations, remains positive versus other sources of return available in the world today, such as cash and fixed income. In our view, particular pockets of value still remain, within smaller company stocks and more economically-sensitive areas of the market. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.