The Tail Doesn’t Wag The Dog – Foy Financial Services, Inc.

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

Once again, seasonality provided investors with a big kick-start to the new year. The announcements of the COVID-19 vaccines in November resulted in a huge rally, with both December and January following through right on cue. Once again, the seasonality of the ‘Best Three Contiguous Months’ delivered. Remember that the order of which trends prevail goes: 1) Long-term Bull or Bear Market Trends; 2) Economic Trends; 3) Seasonality Cycles; and finally, 4) Event Reactions. So actually, the past few months shouldn’t have been such a surprise. We are in a long-term Bull Market, an economic expansion as we come out of the COVID recession, with November-January seasonality, and an election event which historically is bullish no matter who wins. That was like holding four aces.

But where is the drama in that? We are made to believe daily COVID mortality numbers, civil unrest, and political tension control the agenda for financial markets. In other words, that the tail wags the dog. That’s just not how it works. So, was it a big surprise when the vaccines popped out of the pharmaceutical pipeline? Absolutely not, and there are more vaccines on the way. The COVID pandemic has been tragic, but it will be resolved. In fact, many experts believe that much of the U.S. will be open for business again in the third quarter of 2021, just a few months down the road. That news should not come as a big surprise either.

The reality is that financial markets look through Event Reactions because they are generally so short-lived. Financial markets may still react to events or news. Rapid computer trading, also known as algo-trading, can be triggered by a number of artificial intelligence (AI) generated signals, straight from the daily news wires. It’s the reality of the times we live in and it may introduce considerable short-term market volatility. However, it does not dominate long-term trends and economic cycles.

Thus far, January has been excellent for domestic equity markets, with the S&P 500 Index rising +2.73%.Even more impressive moves have been seen in the mid cap and small cap indexes. The S&P 400 Mid Cap Index is up +6.42% this month and the S&P Small Cap 600 Index is up +10.22%. Sector strength has continued to be strong for internet, health care, and consumer discretionary sectors. The Dow Jones Internet Composite Index is up +5.28%, with the S&P Composite 1500 Indexes in the Health Care Sector up +4.70%, and in the Consumer Discretionary Sector up +6.03%. The Energy Sector Index is up +10.29%, aided by a huge post-election move in the green energy industries.

International equity markets are also enjoying January, especially the emerging markets. The MSCI Emerging Markets Index is up +7.88% for the month so far. The MSCI Europe Index is up +2.00%, while the MSCI EAFE Index is up +2.47%. All of these markets jumped higher in November as the first of their vaccines became available as well. The recent surge of COVID infections and deaths, however, have started a series of border closings, which will take their toll on their already heavily restricted economies.

Bond markets have not shared in the exuberance of equity markets. The Bloomberg Barclays U.S. Aggregate Bond Index is down -0.53% so far in January, while the Bloomberg Barclays Municipal Bond Index is up +0.33%. The Bloomberg Barclays Global Aggregate Index is down -0.61%, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index up +0.48%. Bond markets should continue to be impacted by the Federal Reserve as it holds short term interest rates near zero. Additionally, investors may be cautious about potential inflationary pressures down the road as the economy continues to open up and pick up speed.

Edward D. Foy, Manager, SELECTOR^® Money Management, Chief Investment Officer, Foy Financial Services, Inc.