Summary

  • The passage of the December stimulus package and clarity around the vaccine timeline has renewed optimism for growth in 2021. Signs of long-term damage to the economy remain surprisingly limited so far and recently issued stimulus checks and extended unemployment insurance are expected to help to sustain consumer spending.
  • The recent outperformance of small cap and value indices reflects a significant 2021 earnings growth rebound from companies most impacted by the pandemic and will likely continue for multiple quarters. Non-mega captech companies will likely outperform due to higher earnings growth.
  • Emerging market equities appear best poised to outperform in the medium term, although Europe and Japan may benefit in 1H 2021 due to depressed valuations, growth acceleration and larger weights to cyclical sectors. We expect global equities to be supported by the lack of investment opportunities in a zero and negative interest rate environment.
  • Inflation is unlikely to be a 2021 issue. The Fed’s “flexible average” inflation targeting (FAIT) strategy translates into keeping its policy rate at 0% through 2023-2025. This will avoid the upward pressure on interest rates which usually accompanies fiscal expansion. For this reason, the Fed’s policy enhances the effectiveness of fiscal policy at a low cost although it constrains monetary policy.
  • 2021 risks include a slower vaccine rollout, a sharp rise in long maturity interest rates, policy missteps and a lack of funding for Fed emergency measures.

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