• The Energy Rebound: Historically, the energy sector has composed more than 10% of the S&P500. With the pandemic exacerbating the already embattled sector, it ended 2020 with a weighting of less than 3% of the index. With the economy continuing to re-open and Saudi Arabia signaling that is will continue cutting production, it is possible that traditional energy companies could rebound in a major way in 2021. So far that seems to be the case with the sector rising 18% in the new year (vs. around 1% for the overall market). That being said, analysts’ outlook still appears bearish overall compared to historical sentiment measures.

• Yellen Discusses Dollar: Treasury nominee Janet Yellen is expected to reaffirm the US’ commitment to allow the dollar value be set by the markets when she testifies on Capitol Hill today. This announcement comes at a time when investors are heavily shorting the dollar (the highest level of such bets in close to a decade) in anticipation of higher fiscal spending and federal deficits in the coming years. Although the US dollar has risen in the new year, it is coming off it worse annual loss in value since 2017. 

• Passive Indexing:   The 10 largest companies in the S&P500 now compose over 30% of the entire index. Additionally three sectors (technology, healthcare, and consumer discretionary) make up over half of the S&P500’s value, with technology being the largest (around 28%). The consequence of such over-weight allocation is that the passive investing strategy that some large and small investors often pursue may no longer offer one of its main historical benefits: diversification. This is particularly true if interest rates rise since such a movement would have a disproportionally worse effect on the value of growth technology companies which rely on future earnings.

• Italy Piles on Debt:  Italy forecasts that its debts will soar to a new post-war record level of 158.5% of GDP in the new year. This increase comes as a result of last week’s stimulus package worth around $39 billion (USD). Although Italy has the second highest debt burden within the EU (only behind Greece), it has also been aggressive in using the current low interest rates to refinance its existing debt in order to push maturities further out into the future. As a result, Italy’s debt servicing costs should continue to fall.