2021: reflation, reopening, and readjustment
Investors are looking forward to a broadening expansion but volatility may be likely.
- Dirk Hofschire, CFA SVP; Jake Weinstein, CFA Research Analyst, Asset Allocation Research; Lisa Emsbo-Mattingly, CBE Director, Asset Allocation Research; Jenna Christensen Research Associate, Asset Allocation Research; Cait Dourney, CFA, Research Analyst, Asset Allocation Research
- – 01/05/2021
Key takeaways
|
Macroeconomic backdrop: Constructive cycle progression despite winter doldrums
The global business cycle will begin 2021 in recovery mode.
|
The winter virus resurgence presents a near-term headwind for economic improvement, but not one that we expect will generate a double-dip recession.
|
|
Policy environment: Supportive monetary, uncertain fiscal
Global monetary policy remains extremely accommodative, with the Federal Reserve and other central banks anchoring short-term interest rates around zero and expanding their balance sheets through quantitative easing (QE) and other extraordinary programs. See the chart, Monetary policy from central banks around the world remains extremely accommodative.
|
Fiscal-policy uncertainty contributes to the cloudy inflation outlook for 2021.
|
|
Reflation driven by reopening expectations: Expect some volatility too
Positive vaccine developments and expectations for a full economic reopening in 2021 generated a “reflation” trade in financial markets during the final months of 2020. A reflation trade is marked by upward pressure on Treasury bond yields amid rising expectations for an acceleration in nominal growth.
After a period of weak growth amid falling real (inflation-adjusted) rates though the first two-thirds of 2020, real rates bottomed on September 1 and rose modestly from extremely low, negative levels. See the chart, Real yields rose modestly since September, as investors anticipated a rise in inflation. Since then, real yields have trended lower since mid-November but ended the year higher than their August trough.
|
|
As the reopening becomes reality, financial-market patterns may be influenced heavily by the trajectory of policy, inflation, and real interest rates.
|
|
Readjustment: Beyond 2021
As businesses, consumers, and policymakers adjust to the post-pandemic landscape, financial markets are likely to readjust their own expectations.
|
Next steps to consider
Research investments
Get industry-leading investment analysis.
Analyze your portfolio
Find investing ideas to match your goals.
Invest using the cycle
See how the cycle has impacted performance.