Week of January 11, 2021

The U.S. stock market is coming off a solid week to start 2021 as investors looked past the violent siege of the Capital and focused on the prospect for additional fiscal stimulus after the Democrats swept the Georgia senatorial run-offs for the full control in Congress.   The S&P 500 climbed for four straight days to a new record high gaining 1.8% last week.  The Dow and the tech-heavy NASDAQ also gained for the week, 1.6% and 2.4%, respectively.

Last week’s rally was in the face of the political upheaval in Washington, DC, and still growing numbers of COVID infections, raising concerns that investors have grown too exuberant.  “Everything is a little bumpier than we expected it to be a week ago,” said Luca Paolini, chief strategist at Pictet Asset Management.  “It feels like 2020 hasn’t really ended.  We are in the middle of a pandemic; we are still talking about U.S. politics even more than before. The underlying story is pretty much the same.”

Tensions will be high in Washington again this week and it remains to be seen when or if the markets will be affected by it.  Democrats, with the support of some Republicans, are moving toward starting impeachment proceedings in the House against President Trump as soon as this week for inciting the mob attack at the Capital.  The House Rules Committee is expected to expedite impeachment proceedings without committee hearings or votes.

Following the market lows of last March, the U.S. equity markets have staged a powerful rally through the end of 2020 and into 2021.  That mood may be changing, however, as the unrest in Washington, along with the continued pandemic and a poor labor report last week, are increasing the likelihood of a potential correction in the markets by the end of the first quarter of 2021.  The falling dollar and the outlook of greater economic activity have kept stock valuations at or near all-time highs.