- Global financial markets are continuing to anticipate a robust recovery from COVID and the upcoming transition into an economic expansion beyond pre-pandemic levels.
- U.S. Federal Reserve Bank continues to reaffirm a patient tolerance for higher inflation levels while the American economy returns to full employment.
- 10-year U.S. Treasury bond yields are increasing rapidly; moving from around 1% at the beginning of the year and touching 1.75% last week. Overall, the rising bond yields reflect optimism for the upcoming economic recovery.
- In February, we positioned a large component of our bond allocations into money market funds to protect the portfolio from the corrosive effect of rising interest rates on bond values.
- Equity earnings are projected to be robust in 2021, exceeding 2019 levels and increasing to potential double-digit growth in 2022. However, we do expect volatility throughout the year, while COVID cases remain at persistently high levels.
As we wind down the first quarter of 2021, the U.S. and global financial markets are continuing to anticipate a robust recovery from COVID and the upcoming transition into an economic expansion beyond pre-pandemic levels.
U.S. economic growth is accelerating as rising vaccinations, increases in vaccine production, and easing social-distancing policies are beginning to inspire more business activity. Vaccine rollouts around the world are progressing at different speeds. Despite China having one of the world’s slowest vaccination rollouts, Chinese stocks have been among the most productive this year. The U.K. was the first country to begin vaccinations and remains the leader worldwide, with the U.S. a close #2. Vaccine distribution and herd immunity will go a long way toward releasing a considerable amount of pent-up consumer consumption demand.
Countries throughout the world have committed more than $30 Trillion of Fiscal Stimulus into their economies. While still optimistic, investors’ outlook now includes increasing expectations for inflation. Chairman Jerome Powell of the U.S. Federal Reserve Bank continues to reaffirm a patient tolerance for higher inflation levels while the American economy returns to full employment. We are not expecting an increase in interest rates by our central bank anytime soon. Meanwhile, 10-year U.S. Treasury bond yields are increasing rapidly; moving from around 1% at the beginning of the year and touching 1.75% last week. Overall, the rising bond yields reflect optimism for the upcoming economic recovery.
As expected, financial markets are demonstrating more volatility this year within the confluence of optimism, high valuations, and increasing bond market interest rates. COVID continues to move markets dynamically. In February, we positioned a large component of our bond allocations into money market funds to shorten the overall fixed-income duration and maturities in our portfolios and help protect against accelerating bond yields. We expect to redeploy those monies back into diversified bonds over the next year. The higher yields are also lowering the present value calculations of 2020’s stock market winners; fast-growing technology, telecommunication, and healthcare companies. Market leadership continues to rotate toward the old-economy value sector of the American stock market. Blackrock is forecasting S&P 500 earnings to exceed 2019 levels this year and increase to potential double-digit growth in 2022. Despite the prevailing optimism, we do expect volatility throughout the year, while COVID cases remain at persistently high levels.
Our diversified investment portfolios are well-positioned to continue participating in the nascent recovery of the global economy from the COVID pandemic.