It’s no secret that 2020 strained the markets in a number of ways. Whether you want to look at the U.S. election cycle, the coronavirus, or civil unrest, news agencies had their fill of headlines. So, what possible pitfalls could we see as global economies start to recover from 2020?
The first thing we need to look at is the pace of recovery from the global pandemic. The more people who are working and are willing to go back to their pre-pandemic activities, the faster the U.S. economy will return to the 2019 GDP and beyond. This means that we need to continue to see a decrease in the number of COVID-19 cases and an increase in the percentage of the population that is immune to the virus. We have seen a large decline in COVID-19 cases over the past few months, and hopefully we will continue to see decreases all throughout the summer.
Another area to keep an eye on is interest rate levels. The Federal Reserve released a statement on March 17, 2021, detailing that they will continue to maintain the low interest rates that we have seen since last March, and they do not plan on increasing rates for at least the next year (1). This soft Fed policy will lead to the Fed purchasing more securities and continuing to ease monetary policy, which tends to lead to growth in the stock market.
Traditionally, low interest rates and a growing market tend to be indicators of inflation. However, the outlook for inflation this year is 2.2% and is projected to remain stable for the next couple of years.
When our investment committee creates the portfolios that you invest in, our goal is to outpace inflation by at least 3%. That is the baseline that we use in our plans and formulates the overall outlook that we take for your investments from a 3-, 5- and 10-year period. Traditionally, the best way to hedge against inflation is a mix of equities and bonds that create your portfolio asset allocation. No matter what 2021 holds, we will continue to take a long-term approach when managing your investments. With our dynamic asset allocation system, we are alerted and able to buy during market dips and sell at market highs to keep your portfolio allocation on track with your goals.
To learn more about the 2021 economic outlook please read the below article from Vanguard: