The Independent Market Observer

Looking Back at the Markets in December 2020 and Ahead to January 2021

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jan 5, 2021 3:35:32 PM

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December capped a great quarter and year for the markets. Commonwealth CIO Brad McMillan looks ahead to diminishing medical and political risks in January.At the start of a new year, it makes sense to look back and see where we were, before looking ahead to where we are going. This year, doing this is especially important, given the significant changes we saw in December. But we start January in a very different place—a place with better news, better prospects, and lower risks.

Looking Back

Markets continue to rally. Markets are reflecting the improved environment. December 2020 was a great month for pretty much every financial asset, capping a great quarter and a great year. The U.S. markets were up between 3 percent and 6 percent for the month, and between 10 percent and 16 percent for the quarter. International markets were up between 4 percent and 8 percent for the month, and between 16 percent and 20 percent for the quarter.

Reasons to believe. The gains came in both November and December, as the political and medical news started to change from dismal to better. The first step toward improvement was the completion of the election, which reduced political uncertainty. That step was followed by the approval of two different vaccines for COVID-19, which started to reduce medical uncertainty. As we entered December, there were good reasons to believe things would get better.

Prolonged uncertainty. But for most of the month, things did not get better. Court cases challenged the election, and the headlines around them prolonged the political uncertainty. The third wave of the pandemic continued to get worse, threatening health care systems in multiple states. The economic damage continued to mount, with layoffs spiking back up and consumer spending ratcheting down. For most of the month, the good news in November looked to be very much in question.

Risks dropping. But in the last week or so of December, the clouds started to break. There were signs the pandemic’s third wave might be peaking. Vaccinations started around the country. Congress passed a new federal stimulus bill, which will help carry consumers through until the economy is growing steadily stronger. Both the medical and economic risks at the end of the month looked to be significantly less than at the start, despite the ongoing pandemic and political uncertainty.

Looking Ahead

Risks diminish here and abroad. As we start the new year, the positive signs have continued. Vaccinations have started and will ramp up as states build out the necessary distribution infrastructure. Increasing levels of vaccination will mitigate the medical risks. Political risks continue to diminish, both domestically as the inauguration approaches and internationally as a final Brexit deal was signed between the United Kingdom and the European Union. And, although it will take a while for the data to catch up, the stimulus package should start putting checks in bank accounts in the next week or so. The worst of the pandemic and the associated economic damage may be moving behind us.

Bumps ahead, but also progress. That said, there will certainly be bumps along the way. Right now, the headlines are about how slowly vaccinations are going. But those same headlines will drive improvements, and deployment of the vaccines will only accelerate over the coming weeks. We will see more headlines about political risk between now and the inauguration, and possibly even afterwards. In addition, the Senate elections in Georgia may inject their own drama, but by month-end we will have a new administration and Congress. On the economic front, backward-looking data will continue to disappoint for at least the next month or two. January, as we go through it, will not look very pretty at all. But even so, the stimulus checks will help carry us through until the medical news improves.

Data is the key. To get away from the headlines, watch the actual data. Watch the vaccination numbers, which will go up. Watch the case numbers, which are likely to go down toward month-end, if not before. The medical news will lead the economic news, as it has so far. And when the medical news improves sentiment, the economic data will follow.

Looking Forward to Better Things

Looking back at December, we can see lots of bad news—but things started to make a turn for the better at month-end. Looking at January so far, we still see that slow turn, as the news isn’t all that good yet. By the time we get to the end of January, however, the turn should be more apparent. Things are getting better, and that will be the story of the coming month.

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