Investment Outlook

We’re on the Road to Normal

Medical researchers and health organizations worldwide have made remarkable progress in preventing and treating COVID-19. The rollout of multiple effective vaccines is providing more solid footing toward normalization.

The world economy is healing as well. Aided by governments’ commitments to accommodative interest rate policies and increasingly large fiscal stimulus packages, International Monetary Fund researchers are expecting the global economy to grow a robust 5.5% in 2021.¹ And, with progress in reopening the most damaged parts of the economy, corporate profits are climbing out of a deep hole with companies offering clearer outlooks for future profits.

The Opportunity Set Is Widening

The market has rewarded companies benefiting from the increased demand for cloud computing, 5G and expansion of e-commerce and digital payment services since the start of the pandemic. Investors have also gravitated to businesses tied to remote working, telemedicine and other coronavirus-related practices that are likely here to stay.

Now, a broader swath of the market is participating in these advances. Cyclical stocks are rising on expectations that improving health and economic conditions will unleash pent-up demand. Beneficiaries should include energy companies, automakers and businesses related to leisure travel. Banks could also experience a tailwind, especially if interest rates continue to rise, and losses from bad loans aren’t as extensive as originally expected. These developments are positive for value-oriented portfolios, which have historically outperformed during periods of rapid economic growth.

Smaller companies are rising, and we believe they still have room to run. Small caps have historically performed well coming out of recessions, and forecasts call for their earnings growth to outpace that of large caps this year.² With nearly one-third of their profits derived from the housing market, U.S. small caps are also benefiting from the pandemic-related trend of households moving from urban settings to the suburbs.³

In emerging markets, analysts are projecting earnings to outperform developed markets again this year. We expect broader participation with estimates for all sectors in positive territory.⁴ Along with vaccine progress and stimulus, emerging markets are benefiting from the improving growth outlook and a weaker U.S. dollar.

Higher Inflationary Pressure Is on the Way

We believe investors should be evaluating their portfolios with an eye toward the potential for higher inflation. We don’t expect destructive runaway inflation reminiscent of the 1970s, but we think the U.S. Consumer Price Index will rise through the rest of the year. Don’t be surprised by periods above the 2% historical norm.

After years of unusually low inflation, we recommend our clients review how their overall investment strategies incorporate inflation management and protection. 

It’s Time to Be Optimistic

After a long year, these March days with glimpses of warmer times to come seem particularly sweet. Unlike a year ago, when uncertainty was so widespread, we now see more clarity looking ahead.

Thank you for entrusting us with your assets.