Capital markets outlook


David Joy, Chief Market Strategist – Ameriprise Financial


Recent successes toward a safe and effective COVID-19 vaccine have made investors optimistic. They envision a return to sustainable global economic growth in the new year.

Once consumers regain confidence to move about as freely as they did before the pandemic, activity could surge. While there are logistical challenges with the vaccine rollout — and questions about adoption rates — the global economy should enjoy an acceleration of growth by midyear.

Against that backdrop, here is a summary of what investors should watch for in the coming months.

 

Economic growth projections

Recent surveys anticipate 2021 U.S. economic growth of roughly 4.0%, an improvement over the 3.5% decline in 2020. The pace toward next year’s growth rate may not be even. As the coronavirus persists, there is a chance that business and consumer activity could remain weak to start the year.

But when a vaccine is in widespread use, we could see a temporary surge of spending as consumers satisfy their pent-up demand. This pattern would unfold in the U.S. and Europe, but less so in Asia where the pandemic recovery is well underway, especially in China. Overall, the global economy is expected to grow by roughly 5%, compared to the estimated 4.5% decline in 2020.

          

Monetary and fiscal support

Given the still-fragile nature of the global economy, monetary support should remain extremely supportive. The Federal Reserve has signaled it intends to keep rates at virtually zero for an extended period, and other major central banks remain exceedingly accommodative.

Continued fiscal policy support is less certain, given sizeable budget deficits, debt levels and potential political opposition. However, deficit spending will remain very much in vogue for some time. 

       

Corporate earnings

Improving economic activity should translate into a meaningful rise in corporate earnings. After the decline of 15% last year, earnings are expected to climb 22% this year.

It should be noted that U.S. stocks have rallied sharply since their March 2020 lows. The current levels reflect some of the anticipated economic boost. Overall, we believe that:

  • Stock prices can still deliver attractive returns this year, likely in the range of their long-term averages — high single-digit to low double-digit returns.
  • As the recovery broadens, market leadership of cyclical, economically sensitive stocks will persist.
  • Market volatility should be lower than it was in 2020, when volatility averaged 50% above its long-term average.

       

Fixed income

Bond markets could experience a modest rise in yields in response to improving conditions in 2021 and the expected supply. But any rise should be limited by the absence of structural inflationary pressures. Credit quality is likely to continue deteriorating in the first part of the year, but eventually it will begin to stabilize as economic conditions improve.

 

Policy developments

The new year will not be without policy challenges.

  • The Biden administration will need to develop a strategy toward China regarding trade, technology, supply chains and national security. Trade policy in general is likely to be reframed (including the disposition of tariffs imposed by the Trump administration) along with the UK relationship after Brexit.
  • Climate change will become a more visible issue, with possible implications for the economy and stock market.
  • Efforts to address income and wealth inequality issues could have implications for the labor market, inflation, consumer spending and corporate profitability.

 

In summary

There are many variables that will influence the direction of the economy and stock prices in 2021. We believe investors should remain pragmatic and continue to maintain a well-diversified portfolio with high-quality investments. As questions arise or your goals change, contact your Ameriprise financial advisor. They are committed to provide you with personalized financial advice to navigate the year ahead and stay aligned to your goals.

 

Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.