* Washington is on high alert today as it prepares for Biden’s inauguration ceremony amid significant security measures.
* Biden intends to issue a series of executive orders aimed at overturning the policies set by Trump.
* Treasury Secretary nominee Janet Yellen is pushing for a comprehensive stimulus package, which she advocates strongly for.
* Yellen asserts that the U.S. is capable of a higher corporate tax rate if implemented in coordination with other countries.
* The UK’s annual inflation rate increased to 0.6% in December, yet remains below the Bank of England’s target of 2%.
* Eurozone annual inflation recorded a negative figure of -0.3% in December.
* The Eurozone is implementing measures to cap bond yields—a unique approach for the region.
* The implied inflation forecast for the U.S. Treasury market’s 5-year outlook has risen to a three-year high of 2.12%:
In recent years, small-cap stocks have struggled to keep pace with their larger counterparts. However, signs indicate that this trend may be shifting, particularly in recent months, as indicated by a range of exchange-traded funds (ETFs) that reflect various U.S. equity risk factors.
* Among his first actions as president, Biden is set to unveil a comprehensive immigration bill.
* Yellen plans to advocate for a significant coronavirus relief package today in front of the Senate Finance Committee.
* The Biden administration is preparing to adopt full-employment strategies.
* German investor sentiment has increased more than anticipated this January.
* Extreme weather and infectious diseases are highlighted as top risks for 2021 in the World Economic Outlook report.
* The pandemic has exacerbated the rivalry between the U.S. and China, as stated in a recent WEO report.
* This week, the 10-year Treasury yield starts trading at 1.11%, marking a 10-month peak:
Despite remaining in a stable range, U.S. real estate investment trusts (REITs) have recently outperformed other major asset classes, as evidenced by a selection of exchange-traded funds reported at last Friday’s close (January 15).
* Biden’s team is set to reverse numerous policies from the Trump administration on Wednesday.
* China has reported a GDP growth of 6.5% for Q4 and 2.3% for the entirety of 2020.
* The arrest of Russian opposition leader Navalny has escalated tensions between Russia and the West.
* Incoming Treasury Secretary Yellen is expected to reinforce the commitment to market-based currency exchange rates.
* Underperforming value investing results have started to impact quant strategies negatively.
* U.S. industrial production increased by a solid 1.6% in December.
* The NY Fed’s Manufacturing Index indicated slower growth in January.
* U.S. retail sales saw declines for the third consecutive month in December:
In this issue:
- The small-cap equity rally is gaining momentum
- Portfolio-strategy benchmarks are facing challenges
- Broad market declines are affecting managed-risk strategies
Small-cap stocks are positioning for a promising 2021: Despite ongoing risks including uncertainties concerning the new Biden administration’s capabilities, there is optimism. The President-elect outlined a transformative $1.9 trillion pandemic relief strategy that could significantly energize the economy. However, its fate amid the intricacies of Washington politics remains uncertain. Currently, small-cap stocks appear to be anticipating a favorable year ahead compared to the challenging one that has just passed.
Long-Term Stock Forecasting
Magnus Pedersen (Hvass Laboratories)
December 17, 2020
This paper explores the correlation between valuation ratios and long-term returns on individual stocks or indices. A notable trend is observed: higher valuation ratios are often associated with lower long-term stock returns, and vice versa. The paper further details how changes in share prices relate to valuation ratios such as P/E or P/Sales ratios, providing intuitive insights into stock pricing. By applying this data, we derive a straightforward model for forecasting future stock returns based on current valuation ratios and growth expectations. Interestingly, this model has not been formally documented in previous literature, though many have observed the empirical relationship between valuation ratios and stock returns. We will also address the limitations of the forecasting model using real-world data for various stocks and indices, including the S&P 500.
* Biden has recently detailed a $1.9 trillion Covid-19 relief initiative.
* Today’s U.S. retail sales figures for December are expected to show a decline.
* Economists anticipate U.S. growth of 4.3% in 2021, as per a new survey.
* Fed Chair Powell states that we won’t see rate hikes in the near future.
* A new Covid-19 outbreak in China poses a threat to economic recovery.
* The UK risks a double-dip recession after a 2.6% decline in GDP during November.
* Are renewable energy stocks inflated in value?
* The Philly Fed’s ADS business cycle index has sharply decreased, suggesting recession risk in the U.S.
* U.S. import prices surged beyond expectations in December.
* Jobless claims in the U.S. soared last week to the highest level in five months:
Searching for effective diversification opportunities within equity risk factors has yielded modest results in recent years, particularly exacerbated by the pandemic. The pressing question is whether we are past the worst of it. The answer may be cautiously optimistic, although the forecast remains uncertain. Let’s examine the numbers for clearer insights.
