“Inflation is when you pay 15 dollars for the ten dollar hair cut you got for 5 dollars when you had hair ” Sam Ewins

Despite a selection of noteworthy events that could have unnerved investors at the start of the year, global equities continued their march forward. Amongst these the ongoing impact on the economy that government restrictions are having, continuing tensions not only between China and America but also America and itself as well as disappointing US jobs report at the end of the week was largely ignored. The trends from the latter part of 2020 continue as Mid-cap stocks outperform larger cap ones, and value outperforms growth. The FTSE 100 had another strong week, gaining over 6% despite the expected GDP data out later this week will probably suggest that the UK economy could go back into recession. The US dollar, having been under pressure for so long, rallied towards the end of the week. Bond prices fell and inflation-protected assets rose as investors try to protect themselves against the threat of an increase in the cost of living.  

There has always been a belief that so goes the first five days of the year so goes the rest of the year. According to the Stock Traders Almanac, there is some basis for this belief, when the S&P 500 has been positive, in the first week, more than 80% of the time at year-end with an average gain of about 13%.

The financial weekend press continues to focus on a topic we highlighted this week. How the Fed will react to the market continuing to price in rising inflation? The Fed’s current stance is for the federal funds to maintain the rate at 0 to 1/4 percent until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time. The Fed also reiterated their expectation to keep buying up to 120 billion dollars of bonds every month at its December meeting. Currently, the Fed does not expect the inflation rate to reach its target before 2023. Their first meeting of the year is not until the end of the month, when it comes traders will not be far from their screens.

Looking to the week ahead, this is not the busiest of weeks but as the focus has turned to inflation the US Consumer Price data and retail sales for December will be of some interest. Consumer sentiment has improved recently and we will see if this is reflected in spending over the Christmas period. Fed Chair Powell offers his first public appearance of the year on Thursday, as he takes part in a Princeton Economics webinar. There are a few US companies reporting earnings in the coming week, but the serious stuff starts in the coming weeks.

We get the release of the minutes of the ECB meeting in December, at which meeting the ECB agreed to add fresh stimulus to support the economy. For what it is worth technical analysts suggest that equity markets have further to run.