Blog: You, us, everyone

The S&P 500 is up by a modest 12% YTD, and investor sentiment appears to have taken a turn to the negative. This is not surprising as the negative impact of the pandemic is still here. Before it can become better it will probably still be a little worse, even with the vaccine out there now for distribution.

Yet, this slowdown will not derail the economic recovery worldwide as there are plenty of positive catalysts piling up.

Pent-up consumer demand: After the sharp GDP fall down in 2020, a pent-up consumer demand in many regions is expected to push GDP. In the United States, it could reach 5.1% and in Europe the same is expected to recover to 4.3%.

This positive development comes despite continuing high unemployment, as many households tap into savings to continue spending on some entertainment, travel, and other classic discretionaries. While interest rates are low, a run-on property was observed, and the subsequent price appreciation has contributed to healthy consumer balance sheets. This, together with the hope for a vaccine roll-out, is still an underappreciated tailwind for growth in the 2nd part of 2021.

Stock market valuation: Another precursor of potential economic growth is the small-cap earnings revision trend. In fact, this index has gathered momentum and 91% of the observed companies are now running above their 50-day moving price average. This data set is a very valuable input and suggests, provided history repeats itself, another 18 to 24 months of bull-market. In this context, small caps and cyclicals like financials, industrials, materials, consumer services, as well as emerging market stocks, are expected to benefit strongly from the trend.

Vaccines: There are now a number of products available on the market and shipments have started. Obviously and evidently, in the first round, the most exposed groups and front-line workers will get the most benefit from it.

It is estimated that the broader population will have access to the vaccines in the course of the 2^nd and 3^rd quarters of 2021, which in turn means that after 18 months of its initial appearance, the pandemic will be under control but not eradicated.

Central bank policies: The supply chain disruption that occurred in spring 2020 has strongly derailed the economic concept of “just-in-time”. To help industries get back on track, it was suggested by a number of think-tanks to apply a more coordinated policy response between fiscal and monetary authorities. If implemented, it could result in more government spending and debt monetization. In turn, that would likely add to dollar weakness and higher inflation.

 Downside to this view: The labor markets across the globe remain weak, and this could impact negatively the sentiment in emerging markets. Consequently, and in the wake of disrupted supply chains in emerging markets, developed markets could get hurt. However, we believe that these odds are low as central bank policies will undertake whatever is required to prevent a further fall-out.

Another concern is that policy-fueled expansion is pushing up long-term interest rates, thereby powering up a strong secular inflation cycle. Again, while such a scenario cannot be excluded, much of our GDP (about 68%) is service related and as such key drivers for a prolonged inflation cycle appear to be missing.