As we explore the immediate opportunities and challenges ahead, exchange traded fund investors will have to consider the impacts of the political climate, finding income, and much more.
In the recent webcast, Where We Stand: 2021 Market Outlook, Tom Wald, Chief Investment Officer, Transamerica Asset Management, outlined major points that investors will have to look out for in the new year ahead. For example, the second wave of COVID-19 is inflicting exponentially rising damage. Markets will strive to look to the other side of the virus as high-efficacy vaccines will soon be accessible. Consequently, investors may need to brace for slowing rates of economic growth and market volatility in the early part of 2021. The economic recovery and markets should reaccelerate in the spring and summer months, providing a favorable backdrop for investors as the year moves forward.
Wald also highlighted major factors that we will have to monitor. For instance, all eyes will be on Georgia in January as runoff elections will determine Senate majority – the runoff is important since history infers a market preference for split-party control between the White House and Congress. He warned that majority Senate control will likely play a decisive role in the potential future passage of Biden’s tax plan.
Transamerica will look for annual GDP growth of 4% in 2021, but 1Q could be challenging given remaining vaccine distribution and rising COVID-19 case numbers. Thereafter, Wald believes the economy could be capable of substantially higher growth in the second half of the year.
In the equity markets, Transamerica’s year-end price target on the S&P 500 is 4,200, but early months could see downside risk while economic growth temporarily slows. Long-term catalysts include economic and earnings recoveries running ahead of expectations, eventual fiscal stimulus, a lower-for-longer interest rate environment, and additional liquidity-based monetary stimulus from the Fed. Meanwhile, value stocks could finally be setting up for meaningful parity with growth stocks as the year moves forward.
“We believe current stock valuations are mostly attractive given earnings-yield comparisons to longer-term interest rates,” Wald said.
The Federal Reserve will likely maintain a lower-for-longer short-term rate environment and current levels of open market activity. Transamerica sees a range for the 10-year Treasury rate of 0.75%–1.35%. This lower rate environment combined with the Fed’s ongoing open market activity should provide a tailwind for the markets throughout 2021.
On the credit markets side, fundamentals are likely to continue to see improvement, but current credit spreads appear to reflect that high-yield and investment-grade bond investors should expect coupon-type total returns in the year ahead. Wald also argued that investors can still seek excess returns through active managers capable of identifying individual opportunities not found in passive bond indices.
Lastly, Transamerica sees international developed and emerging markets as well-positioned for the global recovery as growth directionally shifts in the year ahead, though uncertainties include the timing of recovery and second wave of the virus. He expects 2021 recovery in global economic growth of about +5%.
Wald also outlined Transamerica’s general positioning for the year ahead with a weighted focus on stocks over bonds within balanced or asset allocation portfolios. He argued that investors should rebalance growth stock gains into value as we could see a regression to the mean for value stocks sometime in the year ahead, along with a rebalance of large-cap stocks into mid- and small-caps.
Investors should also establish or increase international developed and emerging market allocations based on the potential global recovery.
Meanwhile, bond investors should consider keeping portfolios below benchmark durations as Transamerica believes the yield curve will likely steepen later in the year. Bond investors may also want to consider higher allocations of active management for investment-grade and high-yield debt in seeking excess returns above current coupon rates.
Financial advisors who are interested in learning more about Transamerica’s market outlook can watch the webcast here on demand.