Tom Wald, CFA, Chief Investment Officer, Transamerica Asset Management discusses Transamerica’s 2021 Mid-Year Market Outlook. The US economy is predicted to have a 7% GDP growth rate and a V-shaped recovery by the end of 2021.
Consumer demand has accumulated greatly as household savings rose to a multi-decade high during the pandemic. In addition to this pent-up consumer demand stimulating the economy as reopenings continue, the five trillion dollars of fiscal stimulus will continue to act as an economic tailwind. Real aggregate GDP is expected to reach record levels and even surpass the pre-pandemic high of the calendar year 2019.
Wald explains that U.S. stocks are well positioned for future gains, as corporate earnings growth for the calendar year 2021 is expected to eclipse pre-COVID levels, in the same V-shape recovery trajectory that’s expected from GDP. Additionally, Transamerica’s year-end 2021 price target on the S&P 500 is 4,600 and their one-year target is 4,800.
“History infers that stocks perform exceptionally well following post-recession earnings recovery, such as the one we could soon be seeing by the end of this year,” says Wald.
The shift in focus from growth to value stocks is likely to last, and it signals strength in the broader market. Although since April 2020, more than fifteen million jobs have been added to the economy, the labor market is still seven million jobs short of the pre-pandemic high.
“A major reason we believe the Fed will likely not be tapering asset purchases until 2022 and not raise the target of the fed funds rate until 2023 is the lagging recovery in the labor market, following the massive job losses of last year,” says Wald.
High yield credit spreads have narrowed considerably, and investment-grade credit spreads are at multi-year lows, which has created a challenging environment for bond investors to create income without a high degree of interest rate risk. In the next year, there could be a large amount of high-yield rating upgrades, which will provide excess return opportunities.
Importantly, the combination of diversified and nontraditional asset classes will offer a higher yielding portfolio with less interest rate risk. After a difficult decade for international stocks, the strong global economic recovery positions international stocks for a reverse in direction from negative to positive growth. The International Monetary Fund is forecasting global growth to be around 7% in 2021, which will be the highest annual rate of global GDP growth in over a decade.
A potential barrier to this growth is the rise of COVID-19 cases in countries where vaccines still need to be distributed. The delta variant, which had been concerning investors, is less of a concern now, because of the variant’s lower fatality rates and appearance to primarily infect those who haven’t been vaccinated. Inflation is expected to be transitory in nature and return to the 2% trend by the beginning of 2022.
It’s highly probable that there will be a short-term correction in stocks, and Wald explains that the resulting widespread market selloff will be a buying opportunity. As for the current portfolio positioning, Transamerica favors stocks over bonds, due to upside potential for equities and low interest rates within bond markets, and value stocks over growth stocks, since the recent shift into value may be representative of a change in leadership that’s favorable for the broader market.
To achieve a higher yield with lower interest rate risk, bond investors should consider remaining short on the curve, and investors in general should consider a diversified, less-traditional mix of asset classes, which could include floating rate notes, emerging market debt, preferred stocks, and high-dividend common stocks.
Founded in 1904, Transamerica is a holding company for various life insurance companies and investment firms operating primarily in the United States. Transamerica offers life and supplemental health insurance, investments, and retirement services.
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