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

  • On the Record by Chief Investment Officer Tony Roth, where he answers important questions relating to the strength and the length of the U.S. economic bounce as well as the anticipated global upswing and the team’s rationale for a portfolio positioning shift within equities.
  • In Focus offers a Q&A roundtable that helps answer clients’ most-asked questions about the likely fiscal and policy changes and potential impacts on market movements and wealth.
  • Investment positioning and taxable fixed income asset class overview.

The domestic COVID vaccine ramp is resulting in a quick drop in case counts. With this improvement in the public health situation at home and, to a lesser extent, abroad, restrictions on activities and travel are receding rapidly. We must answer the critical questions of how strong will the economic bounce be, how long will it last, and will inflation materially shorten this new economic cycle. Our analysis of the economy and markets points to a synchronized global upswing that we think may last well into 2022 if not longer and that while elevated, global equities will continue to rise. Accordingly, we have shifted portfolio assets further out of investment-grade fixed income and toward equities, specifically international developed stocks, to best position for a continuation of the recovery.

Acceleration, inflation, or stagflation?

The economy is healing and we believe will continue to do so, though there will be setbacks along the way. For example, as pandemic assistance in the form of stimulus checks and extra unemployment benefits roll off, consumer spending is likely to slow, particularly on goods purchases. We caught a glimpse of that in the retail sales figure for April, which disappointed and registered no change month over month. However, consumers are sitting on a collective $2.2 trillion of extra savings and have a whole lot of cabin fever. We expect spending on services—including travel, recreation, and restaurants—to accelerate into the summer, giving a second wind to the economic recovery. Capital expenditures by businesses, particularly on technology, should also aid the economic recovery.

More important than the question of the economy’s resilience, is the considerable debate regarding the possibility of an inflationary overshoot. With so much stimulus and liquidity sloshing about alongside pent-up demand, supply chain issues, and labor shortages, inflation risk appears greater than it has in decades. While the Federal Reserve has promised to let inflation run above target (in fact, the recent change in policy makes this more clearly its goal), the particulars of how to define inflation that has become “too high” or is no longer “transitory” is challenging. This has many worrying that the Fed will have no choice but to renege on every assurance it has made to maintain policy easing and bring an end to the shortest cycle in history.

We fall on the side that expects inflation to be transitory, with base effects, pent-up demand, and supply chain bottlenecks all fading in time to give way to inflation at or incrementally above the Fed’s 2% target.1 However, the inflationary risks are firmly skewed to the upside as services spending is expected to rebound strongly and represents a larger component of the U.S. economy. Inflation expectations have also moved decidedly higher since last year. We retain an overweight to commodities and equities, the latter of which can be an effective inflation hedge if demand allows companies to pass through price increases of inputs to customers.

Please see important disclosures at the end of the article.

[1] The first of the Fed’s two-pronged policy priorities is for stable prices, as measured by 2% year-over-year change in the Personal Consumption Expenditure Index. The other policy priority is maximum employment.

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