Tug of war – bonds vs. equities
This week marks the anniversary of the turning point of the 2020 COVID stock market crash. Investors looking at their one-year portfolio returns may well be astonished to find double-digit return figures, ranging from around 15% for lower risk strategies to close to 50% for pure global equity portfolios. Alas, don’t expect a repeat over the coming months, as these exceptional annual return levels are purely due to the ‘base effect’. When improvements are measured from an exceptionally low point, the percentage increase is particularly pronounced. If we measure from the beginning of 2020, returns are in the much more sustainable range of 5-15%.
Nevertheless, it is pleasing that much of what we projected to clients in our ad hoc crisis communications a year ago has materialised. The global economy remains intact, and near-term growth prospects look strong – as does the likely unprecedented demand spike – once the pandemic finally retreats.
Markets doubt the Fed doves
Interest rates are on hold for years to come, according to the latest announcement from the US Federal Reserve (Fed). After its two-day meeting, monetary policymakers resolved to keep interest rates close to zero, and signalled more of the same until at least 2024. This comes despite upgrades to the Fed’s own economic forecasts, which now plot a stronger path out of the pandemic for the US economy. Due to the rapid vaccine rollout in the US, and a heavy dose of fiscal stimulus from the Biden administration, the Fed’s growth forecasts have moved sharply higher to a 6.5% expansion in 2021 – the biggest since 1984 – with unemployment expected to fall to 4.5% by the end of the year.