Is the Global Economic Recovery Built to Last?
Key economic indicators and portfolio implications are covered by market experts Esty Dwek and Jack Janasiewicz.
But how might the recovery affect the global markets, inflation, asset classes, and more as the rest of 2021 unfolds? Esty Dwek, Head of Global Market Strategy for Natixis Investment Managers Solutions, and Jack Janasiewicz, Portfolio Manager and Portfolio Strategist at Natixis Investment Managers, shared their perspective on key market indicators they are watching and what they think may happen in the months ahead.
6 Key Takeaways
- Global recovery: Both Dwek and Janasiewicz say the Covid-19 vaccination penetration rate is an important indicator to watch for herd immunity. The US currently has a 42% penetration rate, meaning it could start seeing Covid cases drop precipitously and possibly reopen before summer. European countries have seen a slower vaccination rollout and are likely to have a more prudent reopening by end of summer. Dwek believes they will experience a strong second half of the year.
- Fiscal policy: All eyes are on President Biden’s proposed $2.3T infrastructure program, which would take over eight years to implement if passed as is. Given the lack of Republican support for the bill and the amount of time it would take to make its way through the economy, our Natixis strategists remain cautious on the potential impact to clients’ investment strategies.
- Inflation: Dwek says she is not overly concerned about spiraling inflation in the US – even with all of the fiscal stimulus in play – but does expect an uptick in headline and core inflation in the second quarter. She does not, however, have any fears about inflation in Europe, with expectations for it to just barely meet 2%.
- Labor market: The Federal Reserve is looking for an inclusive recovery and has stated that it wants full employment with both price stability and inflation to be above 2%. Key contributors to this will be closing the gap in unemployment rates between white and black/African Americans, increased labor force participation among those without a college degree, and accelerated earnings among low wage workers. Watch for some headwinds in this space.
- Interest rates: Janasiewicz says now is the time to pay attention to rates because they play into the future state of the economy and the dollar. “10-year Treasury yield rates are rising due to improving growth markets, going from 91 basis points (bps) at the beginning of the year to 163 bps at the end of the quarter – a 70-point increase,” he says. “Financial conditions remain supportive, and we don’t expect that to change anytime soon.”
- Asset classes: As the US approaches herd immunity, Janasiewicz sees cyclicals taking leadership, yields drifting higher, small-caps gaining support, and energy prices starting to pick up. Dwek adds that commodities may have room to move even higher, but gold has been a disappointment.
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Inflation is the steady increase in the price of goods and services over time. It devalues units of currency resulting in consequences like higher cost of living. Structural inflation is inflation that results from changes in the structure of demand and supply.
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