Three Questions on the Macro Backdrop for 2021
This past year has been challenging to say the least, from economic shutdowns and stay-at-home orders, to dramatic market swings. The S&P 500 was down over 30% at the end of March, before roaring back and finishing the year up 18.4%. As we turn the page on this turbulent year and look forward, we would like to share a brief market outlook for 2021. In many ways, 2021 looks brighter with vaccine distributions, and accommodative monetary policy which could provide a nice backstop to stock and bond prices.
Loomis Sayles, the well-respected asset manager with $320 billion invested across numerous strategies, provides their outlook for 2021 below. Their comments focus specifically on the credit markets and provide some considerations for this year’s macro-economy.
2021 Outlook: Three Questions on the Macro Backdrop by Craig Burelle, Senior Macro Strategies Analyst of Loomis, Sayles & Co.
- What are some key macro themes that could drive asset performance in 2021?
We see three key drivers supporting asset performance in 2021—COVID-19 vaccine distribution, supportive fiscal policy and monetary policy accommodation.
Let’s look at the first driver, COVID-19 vaccine distribution. The likelihood of an effective vaccine and its distribution has had the markets priced for optimism as they anticipate an eventual end to social distancing measures. As long as the vaccine remains effective and distribution stays on track, risk sentiment should be positive. However, any setbacks may cause investors to reassess valuation levels.
We believe the second driver, supportive fiscal policy, is critical for carrying consumers and small businesses through what will likely be a difficult few months. We expect growth to moderate in the first quarter of 2021 as COVID-19 continues to surge, but continued fiscal support should help contain economic weakness and keep investors focused on the longer-term outlook.
Finally, central banks around the world have signaled their intention to keep monetary policy accommodative for a long period of time, likely beyond 2021. Markets appear satisfied with a dovish tilt to monetary policy. However, ultra-low rates and sizable liquidity are likely to keep developed market and investment grade corporate bond yields in a tight range.
- The Loomis Sayles Macro Strategies Team believes we’re in the recovery phase of the credit cycle, which is historically consistent with a weakening dollar. Do you see a weaker dollar trend in 2021?
Yes. We expect the dollar to slowly trend weaker as long as risk appetite remains strong and the global recovery continues. However, we’re not calling for a multi-year dollar bear market; we think the weakness will be relatively modest. It’s a space we’re watching closely.
- Which asset classes are positioned to perform well in this environment?
We believe relatively higher-yielding asset classes could perform well if the credit cycle progresses through the recovery phase, particularly in emerging markets and foreign exchange. U.S. high yield corporate credit could also benefit from improved economic activity. However, for long-term investors, we believe security selection will be important for helping to distinguish quality securities from those that may be riding the tide of positive investor sentiment.