Investors were quick to praise the historic last-minute deal reached with the EU, giving it a ‘thumbs up’ and breathing a sigh of relief that the UK market would not experience the fall that was predicted if we left the EU without a deal. The conclusion of a deal removes much of the uncertainty that has been a strong headwind for the UK markets since the referendum.

It is expected that in the coming months the biggest winners, in theory, may be domestically focussed companies, which should be taken into consideration by investors. The hope is that global investors will now begin to see the UK stock market as investable rather than a ‘pariah of uncertainty’. Many are predicting that the positive news of the deal will result in the pound strengthening against the US dollar over the next 12 months. Investors in UK equity funds, which were among the worst performers of 2020, are hoping the trade deal will result in an improvement in performance. A strong opinion across many firms is also that smaller companies in the UK will outperform the larger companies that have dominated the market in 2020. Reeves Independent utilise a variety of UK equity firms to gain exposure to the possible growth in this sector. The UK stock market is also incredibly diverse with companies growing both in the UK and overseas.

Of course, the UK’s reaction to Covid-19 and the subsequent rollout of vaccines will play a part in the market’s behaviour, so the positive impact of the deal may not be felt as quickly as some may have hoped.

Global shares have reacted positively to the welcome of the 46^th President, buoyed by his promise of $1.9tn in stimulus spending, with government stimulus the main reason why markets have recovered so quickly thus far. Markets are celebrating the idea of Biden overturning several of Trumps actions, the most notable of which was stopping the US’s departure from the WHO and re-joining the Paris climate accord. The rise in the S&P 500 on the 20th January was the biggest on any presidential inauguration day since Ronald Reagan was sworn into office for the second time in 1985.

Similar to the Paris accord reversal, Biden's climate plan is the boldest of any US president in history, with his stance on clean energy a driving factor in his election campaign. Although its early days in his administration, markets are optimistic about the change he will bring to the US. He takes a significantly different approach to tackling COVID-19, the threats of climate change and the US relationship with the rest of the world. Of course, the US has a long path to economic recovery and there are several factors that could help or hinder this journey.

The UK economy continues to be affected by the business closures brought on by the pandemic, with the UK having a bias to the service sector, it continues to be hit particularly hard. The Furlough scheme is estimated to end in April, leading to estimates of a sharp jump in jobless figures to 6% or 7%. This has prompted many to urge Chancellor Rishi Sunak to extend the scheme, with business groups convinced that the scheme needs to be expanded and linked with how successful the vaccination program is. The government is facing the dilemma of risking further economic scarring if they choose not to extend the scheme and leave thousands of people and businesses to fend for themselves without a buffer, while an extension would cause further havoc to the already staggering government borrowing.

Over 2020 the UK Government borrowed a record £394bn in an attempt to minimise the damage caused to the economy. In addition, the UK are still experiencing a record low Bank of England Base Rate of 0.1%. Despite these measures, it is still predicted by the Office for Budget Responsibility that the UK economy shrank by over 11% last year and will not return to the pre-pandemic levels until the fourth quarter of 2022.

Some commentators have noted that speculative bets on such diverse assets such as Bitcoin and Tesla, are becoming extremely overvalued, resulting in the creation of an ‘epic bubble’. In particular, technology stock valuations are climbing at a rapid rate with some analysts suggesting they are heading to dotcom levels. Unlike most, these stocks have benefitted from COVID-19 behavioural shifts and were among the first to rally back in March.

Analysts at Absolute Strategy Research produced a checklist of bubble indicators. Some of the most common features include low interest rates, stock valuations that tower over earnings, and rapid accelerations in equity gains.  Some are attributing the potential bubble to the explosion of amateur investors on the back of lockdown boredom, whilst others feel that with interest rates remaining low, fund managers are feeling pressured to jump on the bandwagon for fear of ‘missing out’.

Whatever the case, with no sign of central banks raising interest rates anytime soon and investors’ expectations growing about rallying stocks, the jury remains out on the eventual outcome. There is a common them of discussion between ‘Stay at Home’ type stocks that have been the beneficiaries of 2020 and the ‘Reopening’ stocks that will prosper once we return to normal. However, there are many companies that fit until the middle sector that are able deliver consistent returns throughout the uncertainty. At Reeves, we believe in the importance of choosing funds that are able to diversify their holdings. Also, we ensure our portfolios have sufficient diversification against larger market movements, not all funds will perform well in the same economic climate.

Many of the hedge funds holding short positions were subject to a ‘short squeeze’, in which money is poured into a stock to drive up the price, if this happens then the short sellers incur losses and then need to cover their initial bets to avoid steeper losses. To pay for these loses, many funds sold off other share positions leading to a 2% downslide of Wall Street’s main indexes.

Although the only significant effects have been felt by those holding short positions on the affected stocks, it does highlight the ever-increasing amount of amateur retail investors and lead many to ponder what effect this will have on markets in the longer term. The role of social media in this has also been questioned and the news has dominated a lot of the mainstream financial news stations.