2021 has gotten off to a slightly bumpy start, as the first trading day of the year featured one of the largest sell-offs in U.S. stocks of the past several months, subsequently followed by a strong recovery rally. The volatility has not been confined to just stocks, as fixed income has also seen some larger moves as markets continue to grapple with an uncertain inflation outlook. Our base case is that the years ahead will be characterized by higher levels of inflation, however, the first half of 2021 could encounter a disinflationary impulse due to the second round of economic lockdowns that were enacted across the Western world.
The broader economic landscape has become heavily reliant on fiscal stimulus, and while the U.S. government recently passed a $1 trillion stimulus package, there is broad agreement that more will be needed in the months ahead in order to maintain the momentum. Consistent with this, recent labor market data showed that job growth in the U.S. has slowed, even though manufacturing and services activity data have remained robust.
With respect to portfolio implications, we continue to recommend a balanced and well-diversified asset-allocation strategy. Stock prices have risen notably over the past several months, but much of this was driven by multiple expansion (higher valuations), rather than higher revenues and earnings, which has led to some comparisons between the 2000 tech bubble and present day. Indeed, some measures, such as Citibank’s “Euphoria/Panic” model shown above, have exceeded the levels seen at the height of the tech bubble, and its these types of quantitative observations that give us pause.