Balancing surging economic growth and inflation
At the beginning of 2021 we expected global economic activity to accelerate as widespread vaccine availability and declining COVID cases led to a resumption of normal life. Halfway through the year economic growth is surging as people return to work, COVID cases plummet, and robust consumer demand across goods and services spurs growth. But with the acceleration of growth comes concerns of an overheating economy, high stock market valuations, and lingering inflation.
In our view economic growth will remain robust into year-end (although at a slower rate than the first half of the year), supporting further market upside. That said, rising input costs and tight labor markets are concerning, and in our view will lead to non-transitory inflationary pressures. Near-term we expect rates to remain low and overall fiscal and monetary policy to remain accommodative and supporting markets, but are anticipating tighter financial conditions in 2022 (i.e. Fed tapering). Amid this backdrop we provide four portfolio themes we are watching going into year-end.
Four portfolio themes to watch into year-end 2021
We expect markets to remain strong in the second half of 2021 amid tailwinds from “return to work” and the resumption of leisure activities (e.g. travel, dining, shows). That said, rising inflation, an overheating economy and looming Fed tapering will likely dampen some of the upside. For investors we suggest maintaining a focus on long-term investment strategy and portfolio design. With the potential for a pick-up in volatility into year-end we suggest investors be proactive and review their portfolios now, and provide the following portfolio themes for consideration.
Here are our four portfolio themes into year-end:
- Prepare for non-transitory inflation
- Recovery growth rates may have peaked, but strong economic growth should persist
- Be ready for the Fed to announce plans to start tapering asset purchases
- Look to Alternatives to provide portfolio diversification as stock and bond correlations rise
ENDNOTES
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.