Interactive Investor

Market snapshot: new catalyst required

22nd January 2021 09:48

Richard Hunter from interactive investor

UK stocks started 2020 well, but have struggled in recent sessions. Here's what's needed for a revival.

Markets have stumbled at the end of a generally directionless week.

The wave of optimism which had gripped the US markets the previous day, as the inauguration of the new President passed without incident, and as investors took hope from some positive political noises around the stimulus package, subsided.

Economic data was mixed, with strong showings from the housing and manufacturing sectors being offset by the unemployment situation. A further 900,000 initial jobless claims added to the 16 million unemployed as at the start of the year. While a marked improvement on the 22 million seen at the peak of the initial lockdown, the requirement for further stimulus as lockdowns continue to be extended is clear.

US markets are still clinging to gains in the first few weeks of trading in the new year, with the Dow Jones ahead by 1.9% and the S&P 500 2.6%.

The tech heavy Nasdaq is now ahead by 5% in 2021, following a positive session which saw some rotation out of the value stocks which had had a good early run, back into growth. The better than expected numbers from Netflix (NASDAQ:NFLX) earlier in the week fuelled hopes that the remainder of the big tech shares will also justify their lofty valuations, with the likes of Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) reporting next week. 

The UK economy is also in sharp focus, with an anaemic retail sales figure for December showing growth of just 0.4% excluding fuel, against expectations of 0.8% and bringing the weakest year on record to a close. The theory that Christmas spending had been pulled forward to November had previously been dispelled with a 2.6% decline, although there was some brief respite for clothing sales in December, where the number was up by 21.5%, albeit from a low base. Unsurprisingly, online sales was the significant winner in 2020 with growth in excess of 46%.

Meanwhile, another £34.1 billion of government borrowing in December brought the cumulative total to £271 billion for 2020, underscoring the inevitability of tax hikes in the March budget. There is, therefore, the increasing need for a substantial amount of 2020’s enforced savings, propelled by pent-up demand, to find its way back into the economy later this year.

This backdrop has taken some of the wind from the sails in what had been a strong start to the year for the FTSE 100. While the index remains ahead by 3.6% so far in 2021, further positive economic encouragement will be required to maintain the momentum.

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