This blog will serve as follow up to our previously released Q1 Investment Themes and is intended to provide an update on what we are seeing as well as our current outlook.  

Here are the top three things we are covering in this week’s blog:

  1. Stocks rallied for most of the month but fell heavily in the last week to finish January in negative territory.
  2. Most economic data points continue to show signs of a weak economy, but Q2 is likely to provide a unique soft spot for YoY comparisons.
  3. The death of the 60/40 portfolio and the role of long volatility in providing liquidity when it is needed the most.

Market Update

January was a volatile month for Equities. After a steep drop on the first day of trading in 2021, dip buyers came in and limited the losses. Supported by the promise of economic stimulus and encouraging vaccine distribution, the market surged back to all-time highs. Strength continued for a majority of January, but a spike in volatility at the end of the month brought the S&P down 4% in the final trading days. With many Investors heavily fixated on the once in a lifetime battle between retail traders and hedge funds, the S&P quietly finished the month down over 1%[1].

Despite speculation that the technology industry may struggle throughout the COVID reopening, the NASDAQ continued to be the most reliable major cap Index and closed January at +1.34%[2].

Small cap equities built upon a strong fourth quarter, finishing nearly 5% higher. Because many small cap companies heavily struggled during the 2020 COVID shutdown, they have the most to gain from the reopening[3].

In line with our 2021 themes, commodities moved higher in January. With inflation expected to rise further over the next year, the outlook for commodities continues to brighten[4].

With nearly every global economy looking forward to soft 2020 YoY comparisons, emerging markets have launched higher. This is a trend we see continuing throughout the first two quarters of 2021[5].

In one of the most volatile short squeezes in recent history, GameStop stock surged by more than 600% in the just four trading days. This alone is a crazy number… but what is even more insane is that the stock was at one point up over 18,500% from its lows in April! But GameStop was just one of the many companies targeted by retail traders. Koss Corporation, AMC Theatres, BlackBerry, and others more than doubled in under a week. However, the fun came to an end when many of the major brokers began limiting purchases of the highly volatile stock[6].

Economic Data Update

New claims began the year at 787,000 but the following week to 965,000. This was the highest level of claims since August and came as COVID cases were spiking around the country[7]. While claims have decreased in the past two weeks, they remain well above the 200,000-count seen at this time last year. Pandemic Unemployment claims remained elevated throughout the month, coming in at 426,000 in the most recent reading. Together, the average 875,000 new claims plus 426,000 pandemic unemployment claims equate to a combined total of 1.3 million[8].

Outside of a small hiccup in early on, continuing claims followed a similar downward trend in the first month of 2021. Despite the encouraging progress, January’s average of 5.04 million continuing claims remains well above the 1.7 million level seen at this time last year[9].

Total claims for unemployment spiked in last week’s reading to 18.2 million, although the main catalyst for that was the extension of emergency assistance from the most recent fiscal package[10]. This number is likely to remain elevated for an extended period as displaced workers look to receive enhanced benefits[11].

On a positive note, the 189 companies that have reported earnings so far have shown substantial growth of 3.91%. We expect this number to grow further in Q2 as the companies hit hardest by COVID begin to present their YoY comparisons[12].

Q4 GDP was released last week and came in slightly worse than economist estimates. On the QoQ basis, GDP grew for the second straight quarter to an annualized rate of 4.0[13]. Given that Q2 of 2020 was the worst GDP reading ever, speculation remains exceedingly bright for a strong YoY reading in Q2 of 2021. For this reason, our bullish outlook on GDP for the first half of 2021 remains well intact[14].

Headline CPI ticked marginally higher in Q4, falling in line with Hedgeye and Bloomberg estimates. Similar to other economic data points, the major jump in CPI is expected to come in Q2 of 2021. The result of this could be bullish for the stock market in the near term but could become troubling if it is not contained[15].

The dreary recovery in consumer sentiment helps to illustrate how disconnection between the stock market and economy. While the S&P 500 trades at 13% above the pre-pandemic highs, consumer sentiment remains at levels not seen since 2014. This level of a disconnect is not sustainable and will likely lead to some form of a correction[16].

Death of the 60/40 Portfolio

As we have discussed in recent posts, the 60/40 portfolio has long been a solution for investors seeking growth while minimizing the risk of substantial downside. This portfolio has been in a sweet spot over the past 40 years with bond interest rates and inflation falling, giving way to strengthening corporate profits and GDP. These elements have led to a long-lasting bull market in bonds and a steady gain in equities[17].

Notably, we have now reached a point where bond interest rates are at all-time lows and equity markets are at all-time highs[18]. Since 2013, the stock market has been on a historic run and has at times appeared unstoppable[EH1] . But we saw in March’s selloff just how quickly that can come to an end. With concerns over future instability in the markets growing, it is critical to explore other asset classes that do not correlate as heavily to stocks and bonds.

To dive deeper into this topic, check out our recent interview with The Mutiny Fund Co-Founder Jason Buck. We had the opportunity to sit down with Jason last week and go in depth on the death of the 60/40 portfolio and the role long volatility plays in ensuring that you always have a chair to sit in when the music stops[19].

Access the slide deck here:

[1] Slide 5: Market Falls as Volatility Spikes

[2] Slide 6: Tech Outperforms

[3] Slide 7: Small Caps Remain Strong

[4] Slide 8: Commodities Inflate Further

[5] Slide 9: Emerging Market Strength

[6] Slide 10: Retail Trading Frenzy


[8] Slide 12: New Claims

[9] Slide 13: Continuing Claims


[11] Slide 14: Total Claims

[12] Slide 15: Corporate Profits


[14] Slide 16: Update on GDP and CPI

[15] Slide 16: Update on GDP and CPI

[16] Slide 17: Consumer Sentiment

[17] Slide 20: Death of the 60/40 Portfolio


[19] Slide 19: Interview with Jason Buck

 [EH1]Please source

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