In our base case short to medium term outlook, we expect the economic and earnings growth cycle, interest rates, and government policy to remain broadly supportive of equities and other risk-asset markets. However, our five-year tactical analysis suggests we should be prepared for an extended period of lower absolute investment returns.
Global stock markets celebrated the one-year anniversary of the pandemic-induced bear market low (from late March 2020) with another strong quarter of returns. The first quarter also saw a continuation of the “reflation rotation” trend that has been happening beneath the market surface over the past several months. And while we believe the most likely scenario over the next year at least is a reflationary one, many investors are wondering if inflation will be a threat anytime soon. Chief Investment Officer Jeremy DeGroot addresses this question and discusses the ways in which broad market trends impacted portfolios.
We think a reasonable base case is for a global economic recovery starting in the second or third quarter once the widespread distribution of effective vaccines gets the pandemic under control.
Watch a replay of our fourth quarter 2020 Litman Gregory research team webinar. Topics covered (among others): inflation, emerging markets, foreign bonds, U.S. dollar risk, and Bitcoin. The presentation slides are available for download.
The likelihood of widespread vaccine distribution supports the case for a cyclical economic recovery beginning in the second and third quarter of 2021. Central bank monetary policy is almost certain to remain very accommodative for at least the next year or two. And fiscal policy is unlikely to be restrictive and could be stimulative, depending on political outcomes. This macro backdrop should be supportive of equities and other financial risk assets, at least for the next year. Over our five-year tactical horizon, we continue to favor emerging-market stocks over U.S. stocks and flexible bond strategies over core bonds. There are always risks to our outlook: the virus and extreme investor optimism in the short term, inflation and China longer term. But overall, there are reasons for optimism for our society, economies, and markets in the year ahead.
Watch a replay of our third quarter 2020 Litman Gregory research team webinar. Topics covered (among others): changes to asset class assumptions, extreme market concentration, election investment implications, and manager updates. The presentation slides are available for download.