2021 Global Market Outlook: The Old Normal

We believe that COVID-19 vaccine prospects are likely to make 2021 a year of global economic recovery. While markets have priced in a fair amount of the good news, more gains seem possible as corporate profits rebound and central banks remain on hold.

Key market themes

With the world in the early post-recession recovery phase of the business cycle, our medium-term outlook for economies and corporate earnings is positive. We believe that 2021 will feature an extended period of low-inflation, low-interest rate growth that favors equities over bonds. There are some near-term risks, however, such as investor sentiment, which has become overly optimistic following recent vaccine announcements. This makes markets more vulnerable to negative news, which could include renewed lockdowns in Europe and North America as virus cases escalate, logistical difficulties in distributing the vaccine, and negative economic growth in early 2021—if government support measures are unwound too quickly. Geopolitics could also deliver negative surprises from China, Iran or Russia as the new administration of President-elect Joe Biden takes power in the U.S.

Our cycle, value, and sentiment investment decision-making process scores global equities as expensive (with the very expensive U.S. market offsetting better value elsewhere), sentiment as overbought, and the cycle as supportive. This leaves us slightly cautious on the near-term outlook, but moderately positive for the medium-term, with expensive valuations offset by the positive cycle outlook.

In the U.S., there likely will be two distinct phases to the path forward. The first—over the northern winter months—looks challenging, as COVID-19 infections explode across the country, leading to partial, localized lockdowns. However, once a vaccine is widely available, we believe that dislocated sectors (e.g., restaurants, travel, and hotels) will bounce back strongly, likely in the second half of 2021. Meanwhile, the Federal Reserve (the Fed) continues to maintain an ultra-accommodative policy stance. Even with our expectation for a robust 2021, the Fed’s focus on generating an inflation overshoot should leave plenty of runway for the expansion to strengthen and broaden. The three biggest challenges we see for markets are the concentration risk in major U.S. equity benchmarks—which have a composition skewed toward the stay-at-home mega cap technology stocks, moderately expensive valuations in equity and credit, and an increasingly optimistic industry consensus.

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Disclosures

The views in this Global Market Outlook report are subject to change at any time based upon market or other conditions and are current as of December 7, 2020. While all material is ...

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