Overview: The market narrative continued last week with investors weighing the potential benefits of fiscal stimulus against the extended lockdowns to fight the pandemic. Markets look this week to Wednesday’s inauguration of President-elect Biden, as investors evaluate the new administration’s proposed $1.9 trillion Covid-19 relief plan. In the U.S., the S&P 500 Index ended the week down -1.5%, as international developed stocks (EAFE) were down -1.4%. In bonds, interest rates held steady, as market participants digested comments from Fed Chair Powell that boosted inflation expectations. The U.S. 10-year Treasury ended the week at a yield of 1.10%, up from 0.92% at the beginning of 2021.

Earnings: The 2020 fourth-quarter earnings season kicked off last week, with JP Morgan expecting the past quarter S&P 500 earnings per share to be -4.8% lower from a year ago. If this outcome is realized, it would mark the fourth consecutive quarter of negative growth. JP Morgan consensus estimates are calling for earnings to contract -16% for the year 2020, but 2021 earnings should bounce strongly. As the pandemic gradually fades into the background, the expectation is that a rebound in earnings will allow the more cyclical parts of the market to outperform, while recognizing the need for exposure to structural growth trends in the long run.

Economic data: U.S. initial jobless claims were reported at 965,000 for the past week, the highest level since August and significantly above expectations. The increase coincides with a sharp rise in Covid-19 cases across the U.S.  In inflation data, the U.S. Consumer Price Index (CPI) rose 1.4% year-over-year in December, showing an increase from November’s 1.2% level.  With significant fiscal stimulus on the horizon, investors continue to monitor the effects of the need for increased borrowing on inflation.

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