Slow Road to Recovery Persists for Many Countries​

Weakened U.S. consumer spending has carried over into the early part of 2021 as certain states and regions experienced renewed lockdowns and mobility restrictions. The prospect of broad vaccine distribution by the end of the quarter should unleash pent up demand. Meanwhile, the fully-recovered housing and capital spending sectors appear unaffected by the virus’ second wave. As the consumer recovery develops throughout the year, expect a pickup in inflation, particularly with energy prices. These increases will be more cyclical as opposed to the beginning of a longer-term inflationary cycle. Ample labor slack (potential supply of workers), healthy industrial production, and intense global competition should prevent inflation from hiking alarmingly higher. ​

Overseas, the virus-ravaged European economy saw fourth-quarter GDP decline. This drop will inevitably continue in the first quarter. Arguably, this region may benefit the most from a vaccine given its dependence on the travel and tourism sectors. Japan’s proximity to the rebounding Chinese markets continues to help drive growth and prevent a second recession. China is on target to produce approximately 8.0% GDP growth in 2021. Currently, its biggest economic risk appears to be overproduction. Although, any delays with vaccine distribution could dampen consumer re-engagement.

Our Perspective

Equity Markets


  • U.S. equities may be vulnerable to a pullback or even a 10% correction in the first quarter. Nevertheless, vaccine optimism, strong earnings and additional fiscal policy relief still support a continued market advance. ​
  • A cyclical rebound in European equities is likely once lockdowns ease and markets look towards the future, beyond the economic damage caused by the virus and the agonizingly slow vaccine rollout.​
  • Japanese equities should continue to perform relatively well on the back of robust export and production sectors. A weaker yen will also be helpful in boosting the earnings of exporters. Some caution is advised due to the recent virus outbreak. ​
  • Chinese equities may have done too well in the economic recovery. Concerns are rising about a possible bubble in these markets. Any monetary tightening would lead to an even higher currency exchange rate, negatively impacting exporters and domestic consumer companies.
Bond Markets

  • The economic rebound and burgeoning inflationary concerns are putting upward pressure on U.S. Treasury yields. The Fed will likely only allow yields to rise to a certain point before it steps in to protect the recovery. A 1.50% cap on the ten-year note is possible. ​
  • High-yield debt, in general, remains fairly valued. Yield spreads against like-maturity Treasurys have fully recovered from the pandemic- induced drop. Heightened default risk in the issues of industries most affected by lockdowns could limit the upside potential. ​
  • Many European bonds continue to sport zero to negative yields across the maturity spectrum. Despite its positive yield, Italy’s debt is also unattractive because of government acrimony and enhanced deficit spending. ​

Monetary Policies/Currencies

  • The Fed recently reaffirmed it would let any inflation run ahead of the 2% target and not prematurely embark on a tightening program. This stance means the level of asset purchases should remain constant until next year, and no rate increases until 2023. ​
  • Various European central banks appear even further away from tapering asset purchases or raising rates. The Bank of England, the European Central Bank and the Swiss National Bank have all hinted they are open to additional cuts.​
  • While under less pressure to ease rates, the Bank of Japan is struggling with the structural limitations around security purchases, particularly equity exchange-traded funds (ETFs). ​
  • In contrast, the Peoples Bank of China may look to tighten rates over the coming months to prevent further property and equity price speculation. From a currency perspective, the Chinese renminbi is the one exception to the stabilization of the U.S. dollar. That said, the Chinese government may limit the currency’s appreciation to protect the country’s export industries.



  • The surprise reduction in OPEC output allowed oil prices to rise to levels where many countries can generate higher profits and U.S. shale producers can ramp up production. These two countervailing forces should keep the price in a relatively narrow trading range until summer. ​
  • Gold ceded some of its alternative store of value* appeal to Bitcoin over the last few months. Still, there is no reason both cannot coexist as a hedge against currency debasement and future inflation. Last year’s rise in gold may fully reflect the continued global monetary ease and the expected cyclical advance in inflation.

What This Means for Investors

The virus’ anticipated second wave is slowing the global economy, but there are many reasons to be optimistic.​ The expected broad distribution of the vaccine by the end of the first quarter and ample fiscal relief mean any pullback or correction in the equity markets should be viewed opportunistically.​ Additionally, inflation concerns should be more cyclical than secular, and central banks should remain supportive and prevent a dramatic rise in rates across the maturity spectrum.​

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