Market Review – January 2021

In this month’s market review, our Chief Options Specialist, Jason Ayres, reflects on the January market conditions.

2020 ended on a much better note than many people expected despite the ongoing uncertainty with the pandemic.

Since December, a lot has happened: the storming of Capitol Hill, full democratic sweep, new COVID-19 variants, and a vaccine role out.

2021 has not been the fresh start people were hoping for. Despite that, we remain bullish on the outlook for the year. We are one step closer to normalcy, which should bode well for the financial markets.

Looking a the U.S. political landscape, the Biden administration is pushing a 1.9 billion-dollar relief plan that is being laebelled as too expensive by both Republican and Democratic lawmakers.

While this has caused some market volatility, the markets continue to trend higher based on this or something similar passing.

This strategy does come with some legitimate concerns for Canadian and U.S. investors, though.

The first is that expectations have been set for grants and forgivable loans and low interest rates to keep people spending. Any deviation from this will surely result in both economic and political unrest.

Secondly, there is risk for an unexpected inflationary spike in the second half of the year as pandemic stresses lift and pent-up demand along with a healthier household balance sheet results in a spending surge.

Will this spike in consumer demand lead to an inflation spike like it did in the 1970s?

FEDs believe inflation will remain manageable and the projected increase is not nearly enough to change their strategy. That said, a serious spike in inflation would impact valuations negatively and is worthy keeping an eye on.

Any inflation jump in prices in the sectors that have suffered the most is likely to be short lived as supply catches up to demand. Inflation pressures should ease allowing Central Banks to maintain their strategy with rates normalizing some time in 2023.