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The economy is running faster than most of us have seen in our lifetimes, and that’s an important feature of our investment outlook.
In the first half of 2021, we witnessed remarkable economic recovery thanks to the increasing distribution of COVID-19 vaccines, increased private savings, low interest rates, and government stimulus. These factors are still providing fuel for growth that we believe should intensify the 2021-2022 economic recovery to its fastest two-year pace since 1965-1966.
What could that mean for markets, and for investors seeking opportunity for growth?
Against the backdrop of a vigorous economic recovery, we favor equities over fixed income. We prefer U.S. Large Cap Equities and U.S. Small Cap Equities and favor Emerging Market Equities over Developed Market ex-U.S. Equities. We favor allocating cash thoughtfully, particularly as investors’ cash holdings have increased significantly since 2007 (see the chart). One potential strategy: dollar-cost averaging.
Dollar-cost averaging involves making investments at set intervals over time to take advantage of market fluctuations and make investing less emotional. It does not guarantee a profit or protect portfolios from losses, it simply focuses on asset accumulation in a systemic way to avoid the guesswork.
This chart illustrates the flow of assets under management (AUM) within money market funds from January 1, 2007 to April 30, 2021. Assets within money market funds are near record highs, with current levels at $3.8 trillion in AUM as of April 30, 2021. During the financial crisis in 2009, money markets fund assets under management rose to $2.2 trillion but fell below $1.5 trillion for period March 2010 to April 2016. Cash on the sidelines remains a positive catalyst for equity markets.
Accommodative monetary policy, fiscal stimulus, and strengthening corporate investments in plant and equipment should support U.S. large-cap equity sectors that tend to outperform early in an economic expansion. Among the sectors in the S&P 500 Index, we believe Industrials, Materials, Financials, and Energy fit this bill.
See more in our Equities outlook.
Why buy bonds?
While we have increased our long-term interest rate targets, we continue to favor the intermediate part of the yield curve. This preference seeks to take advantage of higher yield potential, without overly exposing portfolios to longer-duration securities, which are more rate sensitive and may struggle as interest rates rise.
Learn more in our Fixed income outlook.
Oil price volatility around midyear has dominated the news cycle, but resurgent commodity prices also have included agricultural commodities and industrial metals. We believe that prices will continue moving higher due to strengthening global economic growth and demand.
We believe investors should consider increasing allocations for investors over the tactical 12- to 18-month time frame.
Learn more in our Real Assets outlook.
We expect significant dispersion in performance among sectors, industries, and geographies. This environment should favor stock and credit picking, as well as strategies that capitalize on the economic recovery, increased corporate deal activity, and asset reflation.
If mergers and acquisitions volume continues to increase over the next year, we believe Merger Arbitrage and activist managers should benefit. We expect strong performance from Relative Value strategies focused on Structured Credit and Long/Short Credit and Event Driven managers focused on Distressed Debt.
Learn more in our Alternative investments outlook.
Strong market trends can make for wide market divergences, and so diversification and a disciplined plan to allocate cash are valuable allies now. Our Midyear Outlook details the many potential opportunities and highlights some practices that will help you keep a forward focus.