2nd Quarter Investment Update
Please click here for the complete investment commentary from our research partners at Litman Gregory. In brief, we are watching:
- Fiscal policy, especially in the USA
- Good expectations for equity returns—but bumpy!
It is still too early to say whether and to what extent the past two months’ inflation reports are harbingers of a sustained period of meaningfully higher inflation. Or whether, as the Fed believes (and hopes!), most of the recent sharp price increases will prove transitory, as current supply shortages catch up to demand and increasing productive capacity comes online as the pandemic recedes.
Our current base case is that inflation does not get out of control. But we update our tactical views as new information becomes available. And structurally, our portfolios are well-diversified across a range of macro scenarios around our base case.
As COVID-19 vaccinations and immunity spread across the globe, we continue to expect a strong global economic recovery. This should bode well for riskier but higher-returning asset classes over the near term (next 12 months) at least. While the Fed is now signaling it is moving closer to beginning to taper its QE asset purchases, monetary policy and interest rates should still remain accommodative for a while.
The path of fiscal policy in the United States is less certain, given the political dynamics and polarization. The expiration of the pandemic support programs will turn from a fiscal boost to a fiscal drag later this year and in 2022. But this should also lead to increased labor supply, mitigating wage inflation pressures.
With the likelihood of a U.S. recession very low—absent a severe external shock—we see low risk of a bear market. Of course, 10%-plus stock market corrections can always occur. And as we move further into the U.S. earnings cycle, the odds of a typical mid-cycle market correction increase. Despite elevated S&P 500 valuations and a likely deceleration in S&P 500 earnings growth, we believe global equities have additional return potential in this cycle. More specifically, we continue to see superior shorter- to medium-term return prospects in international and EM equity markets, where earnings have more room for positive surprises and valuations are more reasonable. As always, though, equity investors should be prepared for a bumpy ride.