CIO Letter 2021
Dear Clients and Associates,
Greetings from all of us at Altair. I hope you and your loved ones have emerged from the pandemic in good health. Before you embark on Fourth of July getaways or other summer plans, I want to share a brief overview of the markets and the economy along with our outlook for the rest of the year.
While a formal declaration has yet to be made, the global reopening that continues to accelerate makes clear that the deepest world recession since the Great Depression is over. We have concerns about the unevenness of the recovery, with developing countries with low vaccination rates struggling while the United States and a handful of other leading economies bounce back quickly. On the whole, however, the world economy appears sound and is improving, thanks both to the largess of governments in providing both monetary and fiscal stimulus since the start of the pandemic and the vaccines, which have subdued the spread of COVID-19 where they have been available.
The U.S. economy is in particularly solid shape, although the jobs recovery has a long way to go with more than 7 million of the 22 million positions lost in the pandemic still missing. Pent-up demand and ongoing stimulus have prompted a surge in growth expectations, with real-time U.S. GDP forecasts now projecting a rise by as much as 7% this year, the fastest annual expansion on record. The service economy has taken off recently as vaccinated Americans flock back to restaurants, stores and travel destinations.
This ongoing burst of activity is causing understandable concern about inflation rising to a 13-year high. While it is likely to stay elevated as the economy heats up, we do not anticipate that it will derail either the recovery or the upward-trending market. The year-over-year increase is exacerbated by comparison to the deflated prices of the pandemic’s early months. Inflation is happening in the reopening categories, but it is not broad-based – there is little inflation in health care, education and technology. And we see a number of factors that should keep it transitory: Many workers are not reentering the labor force since they still fear getting COVID-19; parents without child care cannot return to their places of employment until their children are back in school; unemployment benefits are reducing the incentive for some people to work in certain industries, and the work-from-anywhere trend should help keep wages in check as employees prioritize location over raises.
The Federal Reserve, too, has shown that it is ready to act to contain inflation’s rise, including pulling forward its expected timetable for interest-rate increases. But with the jobs recovery having a long way to go, the Fed is in no rush to tighten policy. The bond market reflects similar confidence that no major threat appears imminent: The 10-year Treasury yield has stabilized and nudged down to around 1.5% following a lengthy runup that took it to 1.74% at the end of March.
Anyone who follows the equity market in 2021 through quick glances at the daily headlines could be forgiven for thinking it has been dominated by meme stocks such as GameStop and AMC, SPACs (special purpose acquisition companies), and cryptocurrencies such as Bitcoin. Those noisy trends, however, mask a market that has been propelled steadily higher by a number of less flashy developments. A partial market rotation has seen the comeback of value stocks against long-dominant growth stocks. International stocks have started to outperform U.S. stocks in recent months. Energy, financials and real estate have supplied strong market leadership, taking over from tech stocks following their impressive run in 2020.
We anticipate market volatility this summer and the second half of the year as investors await further guidance on the Fed’s future tightening and on the outcome of proposed legislation to increase taxes, which are likely to take months longer to sort out. Our overall outlook remains positive. We expect economic strength to pick up and the stock market to move higher, albeit at a much more modest pace than the impressive bounceback we saw last year and into 2021. Inflation will likely remain above normal for much or perhaps all of the rest of the year but ultimately should return to normal by, or in, 2022.
I wish you a restful holiday and joyful summer – we have certainly all earned it!
Jason M. Laurie, CFA, CFP®
Managing Director and Chief Investment Officer