2021 economic and investment outlook – the next phase

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[Keith Lerner] At Truist, we’re committed to analyzing long-term trends and near-term influences that create investment opportunities for our clients.

In a year highlighted by a pandemic, few investors would have expected solid market returns. But that's exactly what occurred. Remaining disciplined in the face of uncertainty and our weight-of-the-evidence approach helped us to navigate market dislocations.

Entering 2021, we remain generally positive as we transition:

  • We see a “tale of two halves” for the economy
  • We are moving to the next phase of the equity bull market
  • And we see higher but constrained interest rates

[Sabrina Bowens-Richard] Before diving into 2021, we highlight some of our long-term secular themes that will affect client portfolios and investment goals.

The longer-term structural challenges, such as even higher debt levels, rising geopolitical risk, and aging demographics, remain headwinds. But the good news is that the pandemic has accelerated innovation and technology, as well as healthcare trends that should enhance productivity.

Fiscal support and prolonged monetary accommodation should help to extend the economic cycle beyond the historical average of about five years.

Over the next decade, stocks remain attractive relative to the dwindling number of investments offering above-inflation returns. Our building block approach points to US equity returns over the decade in the mid-single digits over the next decade. And with declining yields, the expected returns for bonds are lower.

As a result, balanced portfolios with exposure to both stocks and bonds will be impacted by lower returns, suggesting investors may need to take on more risk to meet investment objectives.

[Michael Skordeles] Focusing on the near term, social distancing measures are set to continue during the early part of 2021. Bolstered by massive fiscal and monetary stimulus, elevated cash savings provide a cushion to get through the vaccine deployment period.

The global economy is set to grow at the fastest pace since 2010, aided by the world’s two largest economies. China’s economy has already rebounded to pre-pandemic levels, and we expect the US to follow suit in 2021. For the US, we are looking for roughly 4.5% economic growth, which is about twice the pre-pandemic trend.

Growth appears to be spring-loaded and should accelerate dramatically for several quarters later in the year and into 2022 given pent-up demand to “do things,” and most consumers are in much better position financially than a typical post-recessionary exit.

[Keith Lerner] The strongest stage of the bull market is behind us, but we still see upside. The next phase is set to be driven by an earnings recovery.

After such a sharp market rise, valuations are less attractive. However, corporate earnings strength is underappreciated. Surviving companies are set to emerge from this crisis as more efficient and more profitable than ever.

Elevated investor expectations are a risk to our outlook and markets should continue to move in a two steps forward, one step back fashion.

From a positioning standpoint, International Developed Markets are relatively cheap, but these countries went into the pandemic in a more fragile state and we are waiting for an improvement in earnings trends before lifting our view. Therefore, we are maintaining our US bias entering the year.

Within the US, we see a compelling relative opportunity in small caps, and we are pairing that alongside a modest large cap growth tilt.

Our fixed income team expects interest rates to move modestly higher later in 2021 and to see a slightly steeper yield curve as the economy recovers. However, strong global demand and Fed bond purchases are likely to cap the upside in rates.

Also, with yields remaining very low by historical standards, investors will continue to seek out opportunities to boost income. We expect high yield and investment grade corporate bonds to outperform, mostly through the yield pickup. We still see the importance of high quality bonds to help ballast portfolios, given a wider range of potential outcomes.

To summarize, we see more reasons for our constructive view over the next year than reasons for negativity based on obstacles that will remain over the early months of 2021. We see a global economy spring loaded, an equity market with positive but moderating returns, and higher but constrained interest rates.

Importantly, this is a starting point. As the past year reminds us, it will be important to be flexible and adapt as the data shifts.

Your Truist Wealth advisor can help you learn more about how our investment themes will impact your portfolio. We look forward to keeping you informed on our views as the year unfolds. 

2020 was a tumultuous year that tested many investors’ fortitude. It reinforced the importance of a disciplined investment process in the face of uncertainty. Our weight-of-the-evidence approach helped clients navigate through a treacherous period. Being flexible and adapting as the data shifts will be as important as ever as we enter the next phase.

Executive summary

We remain positive heading into 2021, with our work suggesting we’re in a multi-year bull market, supported by an economy in the early stages of expansion. From depressed levels, the global economy, led by the U.S. and China, is set to show the best growth in a decade, though the path forward will be uneven and highly dependent on the rollout of COVID-19 vaccines.

The first phase of the current bull market—the strongest from a return standpoint—appears to be over. In the next phase, we expect positive but moderating returns, sustained by improved earnings. Several of our studies suggest the potential for 10%-plus equity gains in the year ahead. Elevated investor expectations and vaccine deployment execution are among the primary risks to our outlook, and we expect markets to move in a two steps forward, one step back fashion. Within fixed income, we foresee a modest lift in U.S. yields, a slightly steeper yield curve, and continued demand for credit as sectors with rates exceeding inflation dwindle.

Key takeaways

Economy: A tale of two halves

  • Elevated savings and cash balances provide a cushion awaiting vaccine deployment and leaves the economy spring loaded
  • Second half of the year much stronger than the first half
  • We estimate 5.3% – 5.8% U.S. economic growth—the highest since 1999

Equity: Next phase begins

  • Strongest stage behind us, but market still has upside
  • Next phase characterized by positive but moderating returns
  • Drivers shifting from P/E expansion to earnings recovery that is underappreciated, and we expect a snapback towards trend

Fixed income: Higher but constrained yields

  • Base case outlook: 10-year U.S. Treasury yield range of 0.50–1.50%; most of the upside occurring in the second half
  • Increased Treasury supply, recovery, and vaccines should encourage slightly higher yields and a steeper yield curve
  • International demand for U.S. fixed income and Federal Reserve purchases to cap major upside yield moves

Key positioning

  • Overweight equity relative to fixed income and cash
  • Barbell U.S. small cap overweight with large growth
  • Underweight international developed markets until confirmation of trend change
  • Favor Industrials and Materials paired with Technology and Consumer Discretionary
  • Overweight high yield and investment grade bonds
  • U.S. Dollar to stabilize against developed market currencies

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