By Stuart Katz, January 19, 2021
With lawmakers embroiled in historic impeachment proceedings in the wake of the Capitol Hill event, the markets are once again confronting headlines most never thought imaginable. As much as we’d like to escape with a tidy perspective on 2020, there are signs volatility is following us into 2021.
Democratic victors of Georgia’s Senate elections ushered in a new “unified government.” But the current split suggests that more progressive elements of President-elect Joseph R. Biden Jr.’s agenda won’t simply coast through, especially as many moderate Democrats face mid-term elections in 2022.
However, we expect Biden to pass more of his agenda, including Covid-19 relief, tax hikes, climate change, infrastructure and healthcare reform. We also anticipate modestly more inflation and lower real interest rates than previous outlooks.
The upshot of this rare political confluence is that portfolio construction is now primed for selective equity risk assets driven by greater fiscal spending and faster GDP growth. The themes associated with this positive outlook include emerging markets, sustainable opportunities, healthcare transformation and alternative investments.
It is critical for investors to stick with their financial plan, as we believe time in the market is more important than timing the market. Broad equity indexes can stay expensive on a price-to-earnings basis for an extended period as earnings recovery strengthens during 2021. Broadly speaking, we anticipate asset class returns to be modest relative to history.
However, we are relatively more cautious regarding credit risk during the recovery period and prefer more limited overall credit exposure intentionally constructed with shorter duration and higher quality assets. In essence, we advocate deliberately avoiding excess risk in credit portfolios and focusing on capital preservation and stability rather than reaching for yield. Investors who work with disciplined active managers who know what they own are the ones who have the conviction to stay invested.
We remain vigilant with respect to the biggest near-term risks, namely, further social unrest and Covid-19. However, we believe these concerns are unlikely to cause a double-dip recession given the strong monetary and policy support combined with meaningful aggregate consumer savings.
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