2021 Mid-Year Outlook

Source: Factset

While the case for further global economic growth remains compelling, we are mindful that near-term base effect comparisons and a bifurcated pattern of growth may be masking some complexities of the recovery. It is anticipated that a year-end 2021 global output will still be about 2 percent below its pre-pandemic level with many countries not fully recovering output until 2023.

Monetary Policy
While a narrative centering on the potential for heightened inflation has taken hold among investors, the Fed left the existing (and highly accommodative) rate policy and asset purchasing program unchanged at its June meeting. Of note, 13 of the 18 governors now anticipate at least one rate hike being necessary by the end of 2023. Monetary policy elsewhere around the world, on balance, remains stimulative as authorities seek to strike a balance between fostering economic repairs and their respective policy objectives.

Fiscal Policy
Governments across the globe unleashed unprecedented amounts of fiscal stimulus in the immediate aftermath of the pandemic’s onset and measures of additional potential support persist. President Biden’s late May announcement outlining upwards of $6 trillion of supplemental spending serves as the readiest evidence of this pledge. However, we expect the global fiscal response, considered collectively, has likely peaked and that further efforts to initiate stimulus via these channels may prove to be less impactful. In our view, fiscal largesse retains the capacity to vitalize economic activity in the near-term, but investors should be alert to the possibility that the longer-term impacts of wide scale spending can serve as a headwind to economic growth.

Inflation
Perhaps no topic has garnered a higher level of financial press and investor attention than inflation over the last few months. A global economy under rapid repair resulted in supply chain disruptions and notably higher input prices, fueling speculation that inflation may be on an accelerated trajectory to outpace the Fed’s longstanding 2 percent target. However, more recent moderations in, for example, raw material prices suggest some of these pressures are beginning to alleviate as organizations undertake the steps necessary to recalibrate their operations. We accept the Fed’s premise that inflation is likely to run at a meaningfully elevated level in the near term before ultimately settling at a higher than pre-pandemic level, but at a rate that should not threaten the global recovery.

Currency
The Fed’s recent more hawkish tone, while very preliminary and measured, has resulted in a bout of U.S. dollar strength despite the greenback’s somewhat lofty valuation and the geographically broadening economic recovery on display. Otherwise, the dollar was trending weaker for much of the second quarter. Absent a material flight to quality/risk-off market event, we expect the dollar to be range-bound, taking its directional cues from developments on the global economic front and the policy responses devised by authorities to mitigate, what are certain to be, differentiated paths to recovery.

Investment Themes for 2021 – Mid-Year Updates  
We began the year with the general adage that investors would be compensated for bearing thoughtful measures of risk and this stance has, by and large, proven to be a rewarding posture for investors. In our view, prudent risk-taking will continue to be beneficial to investors in the second half of the year. The still potent forces of stimulus and steady gains on the vaccination front continue to nurture reopening plans worldwide but not yet quite to a level suggestive of anything other than that the global economy recovery resides squarely mid-cycle. Capital market returns can still be robust at this stage of the cycle and investors should position themselves accordingly.

1.  The Pandemic’s Wake
Mid-Year Observation & Portfolio Impact At the beginning of the year, we held firm to the notion that an improving global economy, drawing momentum from both stimulus and escalating vaccine distribution, could provide the foundation for a broader pattern of asset class returns. As evidenced in the graph below, this pattern has largely come to pass with small capitalization and value stocks (and other asset classes more directly linked to an economic reawakening) providing return advantages year-to-date over the “stay-at-home” stocks that led the performance rolls as markets regained their footing in the spring of 2020.