Following a strong fourth quarter performance across equity markets, the month of January kicked off with a slow start. Despite the procyclical support that is expected to pave the path to an economic recovery, concerns about new virus strains and a sharp short squeeze shaped equity market returns for the month of January.

Broad equity market indices, such as the Eurostoxx 50 and S&P 500, were slightly down since the start of the year. Both indices reversed the early in the month gains, as new covid-19 variants, their impact on vaccine efficacy and renewed lockdowns triggered concerns over a risk of a slowdown in the economic recovery. Moreover, January ended with a sharp short squeeze, driven by a rally in heavily shorted stocks by retail traders. This in turn led short investors to cover their positions and reduce their long positions, leading to technical selling pressure across equity markets.

Despite that general equity indices posted negative returns for the month of January, the underlying sector performance was mixed. Across both regions, the energy sector continued to outperform the market performance, leading the gains for 2021. Oil, together with other key commodities have gained from the improvement in demand levels over the past months and energy companies continued to benefit. Positioning within the health care sector also yielded positive returns, while European names within the semiconductor space continued to march higher. Meanwhile, the consumer staples sector and financial sector were common laggards across both regions, with the latter particularly weighed down by the performance of insurance companies.

From a fundamental perspective, however, growth remains the key driver to share prices. During the month of January, both the European Central Bank and the US Federal Reserve communicated their intentions to retain accommodative monetary policy to support the economic recovery. The ECB President Lagarde highlighted the importance of maintaining favourable financial conditions as a means to support the economic recovery and achieve the inflation targets, while Federal Chair Powell muted any speculation on premature tapering.

Improving macroeconomic expectations also bode well to a procyclical outlook. Despite acknowledging the “exceptional uncertainty” to the outlook, last week, the IMF issued its updated growth economic projections. The IMF is forecasting a global growth rate of 5.5% in 2021 and 4.2% in 2022, capturing a 0.3% increase relative to the previous forecast. The improvement to the outlook was largely attributed to the multiple vaccine approvals and the start of a vaccination roll-out, against the covid-19 pandemic. Moreover, the IMF global outlook notes how economic activity continues to adapt to this new norm, of “subdued contact-intensive activity”.

More interestingly, the IMF highlights the divergence in the pace of economic recovery across countries, depending on various factors, including health care access and structural economic characteristics prior the pandemic. Across the advanced economies, the United States’ GDP growth forecast stands out. On the back of additional expected fiscal support, the IMF reported an upward revision of 2% to an expected growth rate of 5.1%.

The relative strength of the US economy is also reflected from a micro perspective. So far, one third of companies listed across the S&P 500 have reported results for this quarter’s earnings season. In aggregate, the fourth quarter results have a recorded double-digit earnings surprise and the majority of sectors have also managed to record earnings growth within the quarter.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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