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As we enter 2021, we want to wish you and your family a happy and healthy year ahead. Even though the recent wave of COVID-19 and new restrictions to contain its spread complicate the near-term economic outlook, we expect continued progress on the vaccine front and, ultimately, that moving beyond the pandemic should lead to an economic resurgence in the second half of 2021. The post-pandemic bounce and near-certain passage of additional fiscal stimulus this year are likely to push 2021 U.S. gross domestic product (GDP) above 5%, the highest growth rate in over three decades.
We expect financial markets and the economy to take divergent paths during 2021. Bullish momentum across the equity and credit markets to close 2020 will be hard to derail given the Federal Reserve’s (Fed) willingness to backstop any weakness and print money to fund deficit spending. The “Fed Put” has created a long-running market dynamic since the Great Financial Crisis of 2007-09, in which bad news for the economy is often good news for financial asset prices. This relationship was on full display for the majority of 2020.
The biggest risk to capital markets in the second half of 2021 may be better news on economic growth and inflation, forcing the Fed to reconsider its promise for prolonged zero interest rates and elevated bond purchase activity (quantitative easing). With bond markets in the United States and abroad pricing in little chance of interest rates or inflation moving higher anytime soon, risks are increasing for a replay of the 2013 taper tantrum.
While we expect fixed-income markets to be challenging in 2021, we firmly believe that an active manager can help investors navigate this environment. As the year progresses, we also expect the rise in risk asset prices to lose steam as fundamental valuation leads to a recalibration. The large-cap tech names, powering much of the recent equity market rally, are likely to face emerging headwinds as interest rates begin to normalize.
Exhibit 1. 2019 and 2020 Actual; 2021 and 2022 Forecasts
Source: Bloomberg
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Index Definitions:
S&P 500 Index — An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.
Russell 2000 Index — An index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is comprised of 3,000 of the largest U.S. stocks.
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Disclosures:
The views expressed in this material are the views of PMAM through the year ending December 31, 2020, and are subject to change based on market and other conditions. This material contains certain views that may be deemed forward-looking statements. The inclusion of projections or forecasts should not be regarded as an indication that PMAM considers the forecasts to be reliable predictors of future events. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate. Actual results may differ significantly.
Past performance is not indicative of future results. The views expressed do not constitute investment advice and should not be construed as a recommendation to purchase or sell securities. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. There is no representation or warranty as to the accuracy of the information and PMAM shall have no liability for decisions based upon such information.
