The initial wave of vaccinations will likely bring about a sustained decrease in hospitalizations as elderly populations, which account for 50-60% of hospitalized patients in the US and UK, are vaccinated first. We expect large shares of developed market populations to be vaccinated by mid 2021, with the US approaching 50% in May. Read More
The US economy now stands at 66% reopened, although retail and hospitality remain sensitive to COVID-19 restrictions. We expect the Biden administration’s proposed COVID relief plan, the EU recovery fund, pent-up demand, and an accelerated vaccine rollout to bolster the recovery through relaxed restrictions and reductions in voluntary social distancing. In 2021, we expect the US and Euro Area to grow 6.6% and 5.4%, respectively. Read More
President Biden announced details of his $1.9 trillion (8.6% of GDP) COVID-relief plan, which includes $1,400 stimulus checks, expanded unemployment benefits, state aid, and public health funding. The plan could face hurdles in the Senate, as the 60 vote threshold would require the support of at least 10 Republican senators. Ultimately, we expect a stimulus package worth $1.1 trillion (5% of GDP) to pass between mid-February and mid-March. Read More
While significant policy easing is typically cause for inflationary concern, sizeable slack in the economy from depressed capacity rates and elevated unemployment levels will likely keep inflation contained in 2021. Although inflation is expected to receive a boost from base effects mid-year given COVID-driven weakness mid-last year, we anticipate this rise to be transitory, with US core PCE expected to end the year at 1.8%. Read More
The equity momentum from 2020 should continue into 2021. Our expectation for more upside is supported by 1) above-trend, above consensus global growth, 2) double-digit earnings catch-up, 3) limited structural imbalances and scarring effects, 4) a predictable, macro-guided Federal Reserve, and 5) a near-zero policy rate. Compositionally, earnings growth may drive returns more than valuation, as is common in expansionary phases. Read More
Credit spreads across the quality spectrum have reverted back to pre-crisis levels, but we believe the improving default backdrop, carry potential, and low risk of excessive reflation should still attract investors looking for yield. Our preference for bank loans over HY is reinforced by the potential for further spread compression, lower duration, better loss recovery, and a possible capital flow rotation. In Europe, a stronger ECB “put” and more conservative balance sheet management should enhance credit quality relative to US credit. Read More
A weaker USD remains our base case, though a more moderate pullback should be expected. While market consensus may crowd the trade, we think selling pressure has been concentrated in tactical positioning so far. Surprises to the pace of vaccine recovery or growth expectations are risks to our view. Read More
Speculative positioning in Bitcoin drove outsized return (300%) and volatility (67%) in 2020. A pick-up in retail and institutional participation reflects broader commercial acceptance as a form of payment and cash diversifier usage, respectively. While cryptocurrency adoption is gaining in popularity, we think its existence will likely feature alongside, rather than replace, deeply entrenched, liquid fiat currencies. Read More
Forecasts for higher inflation and higher yields in 2021 pose potential headwinds to risk assets, but we would argue that the stronger growth outlook is the more important catalyst. With continued fiscal and monetary support and a vaccine-shaped recovery, we expect 2021 GDP growth of 6.6% in the US and 6.5% globally. As activity resumes, we expect the reflationary trends to continue, with the US 10-Year Treasury yield ending the year around 1.5% and core PCE inflation reaching 1.8%.
Inflation expectations (as measured by breakeven rates) and nominal rates dislocated last year as policymakers anchored nominal yields while breakeven inflation normalized higher. In 2021, we expect inflation and nominal rates to both edge higher in line with stronger growth expectations. This dynamic may drag on long duration assets, but is likely to support more ‘reflationary assets’ such as value and cyclical equities, as well as commodities.
Historical data suggests that the 10-Year Treasury yield could reach 3.4% before it becomes a meaningful headwind to equity prices. Equities can usually digest rising bond yields as long as they come from low levels, happen gradually, and occur alongside better growth. However, a rapid rise could create speedbumps. An increase of more than two standard deviations in a given month, or approximately 32 basis points today, is typically when market volatility emerges.
The building blocks of a basic portfolio may provide an effective reflation hedge. Core equities and fixed income have historically beaten inflation a majority of the time, and their track record only improves as the investment horizon is extended. Other assets such as TIPS or gold may garner interest, but we would remind investors of their associated challenges with duration, taxes, and funding. Rather than configuring part of a portfolio for inflation purposes, we believe in a long-term commitment to strategic asset allocation.
Top Section Notes: As of January 25, 2021. Breakeven inflation is the difference between the nominal yield on the 10-Year Treasury and the real yield on the 10-Year Treasury InflationProtected Security (TIPS). Middle Section Notes: As of December 31, 2021. Chart shows the median one-month return of different equity indices for a given Z-Score change in the 10- Year US Treasury yield. ‘Z-Score’ is a standardized measure for the number of standard deviations from the mean. Bottom Section Notes: As of December 31, 2020. Chart shows the historical frequency that different asset classes outperformed inflation, based on rolling monthly returns for 1-month to 30-year holding periods. Please see page 3 for additional disclosures. Past performance does not guarantee future results, which may vary.
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