Our market outlook going into 2021 was for ramped up vaccine deployments, accommodative monetary and fiscal policy, and upbeat corporate earnings to drive equity markets higher. We also projected an increase in interest rates and inflation. So far, these investment themes have been playing out as expected – we have seen strong performance, particularly from cyclical sectors such as energy, financials and industrials, and fixed income sold off sharply as the benchmark U.S. 10-year Treasury yield almost doubled from 0.91% to 1.74%. But what does all of this mean for the economy and markets?

Vaccines, fiscal stimulus and the consumer

Monetary and fiscal policy remain supportive. President Joe Biden signed a US$1.9 trillion American Rescue Plan into law, and Canada also unveiled additional stimulus in it’s federal budget. While the Bank of Canada is set to cut the pace of its asset purchases, they have not altered their commitment to keep interest rates low for the foreseeable future. The world is still battling a third wave of the pandemic that could prolong tight economic measures to contain the virus, but countries further along in their vaccination campaigns offer a glimpse of what is to come. Thanks to increased vaccinations and massive fiscal stimulus, U.S. consumer prices increased by the most in more than eight years, albeit off a low base.

What are we looking out for?

The biggest risk to the market, outside of a virus mutation, is if rising growth and inflation leads to rising bond yields, which could disrupt equity markets. One reason for this is that the value of a financial asset is equal to the sum of the present value of its future cash flows. But higher interest rates mean lower present values for financial assets. Companies that are expected to earn cashflows in the distant future – many of which are in the consumer discretionary and information technology sectors – are particularly vulnerable to this phenomenon. 

Where are we optimistic?

With the U.S. Federal Reserve’s shift toward average inflation targeting, we believe the risk is low that central banks will feel compelled to tighten monetary conditions. Moreover, any overshoot in inflation is expected to be temporary. Remember, inflation is being fanned by stimulus payments, pent-up demand and supply chain disruptions. Many of the long-term structural deflationary forces, like automation and demographics, have not reversed.

Rising interest rates that are accompanied by a healthy economy are normal and we expect the recovery in growth to outweigh the drag from rising bond yields. We still prefer equities to bonds, and each portfolio is weighted accordingly. We remain bullish on small caps, the value factor and other beneficiaries of a strengthening economy, as well as a pickup in inflation. Inflation is a real threat to investors’ savings and our flexibility to make asset allocation changes is crucial in this environment.

IMPORTANT DISCLAIMERS

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication.  Market conditions may change which may impact the information contained in this document. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. 

The opinions expressed in the communication are solely those of the authors and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Global Asset Management. and the portfolio manager believe to be reasonable assumptions, neither CI Global Asset Management nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

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Published April 21, 2021.