Markets entered 2021 amid optimism about vaccine developments to combat the spread of COVID-19. The extreme enthusiasm helped to drive many markets to record highs, extending valuations and creating a rotation toward cheaper stocks in more cyclically exposed parts of the economy. In contrast to last year, 2021 looks poised to be a year of reversion rather than momentum, reinforcing the benefits of broader diversification.
Due in part to its role as a safe haven amid the global pandemic, U.S. market outperformance was magnified in 2020, further extending relative U.S. valuations versus the rest of the world. However, 2021 looks more promising for markets outside the U.S. as the coronavirus pandemic and other headwinds begin to fade amid accelerating global growth.
While the precise timing of vaccine distribution is still uncertain and many hurdles remain in the fight against COVID-19, we expect a much healthier economic environment by the end of 2021. Not only can we expect many of 2020's shuttered businesses to reopen, but we are also likely to see two important growth catalysts arising from pent-up demand and renewed fiscal stimulus.
After four decades of trending lower, U.S. short-term rates reached their presumptive bottom of 0% following the onset of the coronavirus pandemic in March 2020. The Federal Reserve responded by dropping the federal funds rate to the 0%-0.25% range and shifted its policy framework to reach maximum employment before raising rates, signaling no rate hikes through 2023. Since short-term Treasury yields historically have tracked the federal funds rate, we see short-term rates staying anchored in 2021.
Probably more than you think. In a low‑yield environment, the traditional role played by bonds in a balanced equity/bond portfolio should be reevaluated. Bonds are important portfolio building blocks for two reasons: income and downside risk management. However, with today’s pervasively low interest rates, the historically dependable income component of the bond universe is almost nonexistent, while the downside risk management aspect is seriously challenged.
This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.
Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.