On Air with Altair: 1Q 2021 Market Review Video
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The economy is revving up and we think the data will continue to provide more upside for markets. Government stimulus checks and the vaccine rollout have given the recovery even more momentum than anticipated ahead of this summer’s “grand reopening.” Positive signs from consumers and businesses alike are driving optimism. And while resilience in the housing and manufacturing industries kept the recovery intact, other areas are now showing momentum too, demonstrating impressive breadth. Economic forecasts point to more than 6% growth in the U.S. in 2021, contributing to the best year for global growth in at least the last 40 years. Government stimulus has launched the economy into a higher gear and we expect fast-improving corporate earnings to carry this growth surge into next year.
SMALL CAPS AND VALUE STOCKS
A market rotation has taken place that began with the rollout of vaccines and we think it has a good chance to remain in place, as the global economy accelerates. Stocks that will benefit more from the economy’s anticipated full reopening have taken over market leadership from the big tech and growth companies that supercharged last year’s rally. In particular, small-cap stocks doubled the return of the S&P 500 in the first quarter, and we maintain our tactical overweight to this asset class. Value stocks, too, have emerged from the shadow of growth stocks to outperform them, as cyclical firms such as banks and energy companies rebound nicely. We also remain overweight large-cap U.S. stocks given the outsized fiscal support from Washington, and the effectiveness of U.S. vaccination programs.
INFLATION CONCERNS OVERSTATED
Government spending and pent-up demand have begun to push inflation numbers higher, and there is general concern this could eventually upend markets. While we anticipate a rise in inflation this spring and summer – in part due to easier year-over-year comps – we do not believe higher inflation rates will be sustainable. The stimulus packages were necessary to heal the damage caused by the pandemic and those benefits are scheduled to sunset later this year. There are also several long-standing deflationary forces, that should help contain a rise in prices, such as automation, globalization and an aging population. We do not believe the Federal Reserve will respond to a near-term inflation rise, by raising rates prematurely. The Fed is focused on getting the economy back to full employment before tightening.
A well-stimulated economy should produce much higher growth in the second half of 2021 and into 2022. The biggest potential threat is a surge of virus mutations that outpaces the rollout of vaccines. Still, we remain constructive on the global economy and are optimistic that corporate earnings will continue to be supportive of markets through at least the remainder of the year.
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