In the April issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, where he reveals how the 2020 recession and ongoing recovery differ from past experience, our overall optimistic view of the U.S. and global economic trajectories, and where we see potential risks and opportunities. 
  • In Focus by Head of Sustainable Investing Steve Norcini answers questions that are top of mind for investors about sustainable investing, including its origins, benefits, and why investors can both do good and do well.
  • Investment positioning and domestic equities asset class overview.

March marked the one-year anniversary of the COVID-19-induced bear market low. The past year could not be more unlike anything any of us have ever experienced. And while no two recessions ever repeat, this one doesn’t even appear to rhyme with anything we’ve seen in history. The nature of the exogenous economic shock, the depth and speed of the economic collapse, and the extraordinary monetary and fiscal response make the 2020 recession truly unique.

Yet, many aspects of the market response one year out appear fairly “textbook.” Equities have rallied significantly off the bottom, with the S&P 500 gaining 78% (including dividends) in the 1-year since March 23, 2020. Small-cap equities have outpaced large cap, delivering 120% total return, according to the Russell 2000 and S&P 500 indices, respectively. Cyclical sectors—that are sensitive to the peaks and troughs of the economy, like energy, materials, industrials, consumer discretionary, and financials—have been the best performers in the S&P 500 index. Commodities, high-yield bonds, and inflation-linked bonds have all delivered strong returns.

As we look ahead to the next year, we remain constructive on equities and have rotated the portfolios to further embrace cyclical and value-oriented equities. We hold overweight positions to equities (including U.S. large cap, U.S. small cap, international developed, and emerging markets), high-yield fixed income, and commodities versus our long-term strategic asset allocation. We fund that with underweight positions to cash, fixed income, and hedge funds.

Economic acceleration

We are quite optimistic on the U.S. and global economic trajectories. An acceleration in the pace of vaccine distribution in the U.S. should permit economic reopening to coincide with fiscal stimulus making its way into the hands of consumers, businesses, and municipalities. Bloomberg median consensus estimate is for GDP growth of 5.7% year over year in 2021. We think this is conservative and believe growth could reach 9% based on reasonable assumptions of how much of the recently approved $1.9 trillion of fiscal support and $2.1 trillion in household savings are spent in 2021. The Treasury has already distributed $325 billion of Economic Impact Payments, which should show up immediately in stronger consumer spending.

We believe inflation is likely to increase over the next 12 months, with our base case for the headline CPI to settle in around 2.75% year over year in the second half of 2021. However, looking out over the next 12–18 months, we expect an elevated savings rate, pent-up demand for services, supply chain bottlenecks in parts of the world, and accommodative monetary policy to further raise inflation risks. The Federal Reserve has repeatedly telegraphed a desire to let inflation expectations and realized inflation run above its target for a prolonged period of time, which we interpret as indicating no increase in the federal funds rate for at least the next 12 months.

Please see important disclosures at the end of the article.

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