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Weekly eLetter 1/22/2021 — Expectations for the New Year

Hello once again and welcome back to the land of blinking screens.

We find at this time of year that it is pretty common for investors (all investors) to make the assumption that markets will continue to behave as they did in the prior calendar year. However, I see some changes taking place that might be worth your consideration.

First on my list, the interest rate environment has clearly changed. Instead of the regular downtrend that moved the yield on the 10-year treasury from 3.2% in fall of 2018 to an incredible low of 0.7% in March of 2020, rates are now definitively trending upward. This appears to be accelerating (perhaps as a result of the ‘blue wave’ which will likely bring additional stimulus), and will likely produce more borrowing and higher tax rates. As the rates increase, the face values of many bonds will decrease.

Personally, I don’t believe this will slow down stocks unless the yield becomes a viable alternative to the dividends paid on stocks, so this is just something we’re watching…for now.

Next there’s the economy. Stocks will usually discount future expectations, and that means that investors will be looking forward to healthier days; and continued decent market returns. Note that the services sector is still struggling as they face new potential lockdowns (re-lockdowns?) which may be enforced, but most of the sectors are looking quite healthy at this time.

Number 3, we still have the virus. And the expectation that vaccines might bring a bit of normalcy. We wonder when will enough people be vaccinated to reach the promised (premised?) heard immunity to turn Covid-19 and future variations to nothing more than a yearly flu-bug?

And into the market: The monster-cap tech stocks are no longer dominating the returns spectrum, and small-caps and cyclicals (that were the losers in 2020) are moving up rapidly. As a matter of fact, I note as I write this that many small-cap indexes are up over 7% already this year!

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