In Brief
Dr. David Kelly
- The U.S. economic expansion has accelerated in 2Q and should continue at a strong pace for the rest of the year, generating a near full recovery in employment and higher inflation.
- International growth was uneven early in the year but should broadly accelerate as vaccines are distributed. A cycle ahead with stronger international economic growth should push the U.S. dollar lower.
- Strong growth and rising inflation should prompt the Fed to taper bond purchases in late 2021/early 2022 and begin to raise short term rates in late 2022/early 2023, pushing long-term interest rates higher.
- In 1H21, value has beaten growth and small caps have beaten large caps; we expect this will continue in 2H21.
- Using earnings as a guide will increase in importance against a backdrop of rising rates, as higher yields will pressure equity valuations.
- International equities should benefit from a falling dollar and lower valuations relative to the U.S., with different regions offering a mix of cyclicality, inflation hedge and structural growth themes.
- Sustainable investing, measured by ESG factors, is likely to be a decade-defining theme and can enhance portfolios by mitigating risk and harnessing the opportunities that come from growth and change, particularly environmental and social shifts.
- More investors are turning to alternatives — both public and private — as a solution in a world of low rates and meager expected returns.
- Commercial real estate is healing, there is plenty of momentum in private equity markets and the outlook for hedge funds will depend on the path of volatility.
- As the global economy continues to recover, it will be important to identify cyclical positioning to find the best opportunities for growth and value.
- In a post-pandemic environment, investors will need to think outside the box, including allocations to international equities and alternatives.
Introduction
The American economy can best be understood as a living organism — not just one that expands and contracts but one that is in a constant state of evolution, usually growing but also being distorted by, and adapting to, a variety of shocks and changes in policy.
This is a particularly important reality to grasp today. At a superficial level, the economy is simply in the midst of a powerful recovery from a deep recession. However, a closer look at the data shows many sectors that remain far from a full recovery as well as many that have positively thrived in the pandemic environment. Moreover, both the economy itself and government policy will forever be changed by the pandemic. While a full recovery remains likely, the full-employment economy of 2022 will be very different from the full-employment economy of 2019 — and the differences may have important implications for investors.
