The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2021 Outlook:
- U.S. economy: Getting worse before it improves.
- Global economy: Ready to get back to normal—with the help of vaccines.
- Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
- Fixed income: A modest-risk overweight with a focus on credit sectors.
- Equities: Lean toward small caps, emerging market shares and dividend payers.
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“It is error alone which needs the support of government. Truth can stand by itself.” – Thomas Jefferson
What’s ahead for 2021? Read what our investment experts have to say
If you’re looking to make sense of the always-shifting financial markets and economic landscape, Nuveen’s Global Investment Committee (GIC) can help. This committee brings together the most senior investors from across the firm’s platform of core and specialist capabilities, including all public and private markets.
In its recently published 2021 Outlook the GIC offers insights for those interested in the health of the U.S. and global economies, and what the year ahead may mean for equity, fixed income and other markets. Our investment leaders across the board expect their asset classes to deliver solid returns next year and continue to see opportunities to outperform their benchmarks.
Below are some key takeaways:
Light at the end of a long, dark tunnel
The global COVID-19 outbreak extracted a heavy human toll and wreaked unprecedented economic damage in 2020. For many businesses and, indeed, entire industries, activity never returned to anywhere near pre-pandemic levels. The service sector, which includes travel, entertainment and restaurants, has been hit the hardest, particularly in the eurozone. In November, that region’s Composite Purchasing Managers’ Index (PMI) showed that service-sector activity slowed to a six-month low.3 Overall, the global economy will not be able to fully recovery until public health crisis has receded into the rearview mirror.
At the same time, there are notable bright spots amid the uncertainty:
- Global manufacturing has staged a strong comeback.
- The U.S. housing market has demonstrated remarkable resilience, thanks to record-low mortgage rates and a shift toward purchasing homes in the suburbs.
- Household and private-sector balance sheets are, on average, in remarkable shape, setting up the global economy for a strong recovery after the pandemic abates.
- China, the world’s second-largest economy, has already seen its early rebound turn into a durable expansion.
- Effective vaccines are beginning to roll out.
Overall, 2021 has the potential to be quite a good year as things return to normal, but we don’t know precisely how long the current pain will last, or how much it might worsen in the near term, before the tide begins to turn.
The ECB beefs up its stimulus. Will the Fed follow suit?
With economic activity in the eurozone slipping back into contraction territory in November and the region enduring a second wave of infections, the European Central Bank—to nobody’s surprise—announced expanded stimulus measures at its December 10 meeting. Among the actions taken, the ECB:
- Increased the size of its quantitative easing (QE) asset purchases under its pandemic emergency purchase program (PEPP), from €1.35 trillion to €1.85 trillion. The ECB plans to continue its bond buying until at least March 2022—nine months longer than planned—in a further bid to reduce borrowing costs in the region.
- Extended through June 2022 its offer to lend to banks at rates as low as -1%, while loosening borrowing conditions. This move should help keep credit flowing to households and businesses.
The ECB also revised its economic outlook. It now anticipates eurozone GDP to expand by 3.9% next year, slower than its September forecast of 5%. Additionally, it expects inflation to remain well below its 2% target, at just 1% in 2021 (unchanged from its last projection) and 1.1% in 2022 (down from 1.3%).4 Such sluggish inflation, in our view, will translate into years of dovish monetary policy.
At her post-meeting press conference, ECB President Christine Lagarde noted that she is monitoring the euro, which has gained about 4% versus the U.S. dollar since October 30 and 8.1% for the year to date.5 The continuing strength of the euro is a headache for the ECB, since a stronger currency hampers efforts to boost inflation toward target levels.
With the ECB’s last meeting for 2020 is now in the books, markets will turn to the Federal Reserve this Wednesday for its last gathering of the year. What do we expect from Chair Jerome Powell and his colleagues?
Their most likely move would be to lengthen the average maturity of the U.S. Treasury securities the Fed purchases each month by targeting larger purchase amounts of longer-duration issues. Doing so should put downward pressure on longer-term yields, helping to keep rates on mortgages and other loans tied to Treasuries from rising.
Also, given the surge in COVID-19 cases, hospitalizations and fatalities, we’ll look for the Fed’s policy statement to be somewhat less upbeat on the U.S. economy’s near-term prospects. At their September meeting, Fed officials upgraded their prior forecasts to reflect a smaller decline in 2020 GDP growth, as well as a lower unemployment rate. But in November they noted that the pandemic “will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” Indeed, the labor market has lost momentum. The economy added a far-below-forecast 245,000 jobs in November, while first-time unemployment claims jumped to a 2½-month high last week.6 That’s why the Fed needs to act.
While we don’t anticipate the Fed to begin purchasing more than its current total of $120 billion per month ($80 billion in Treasuries and $40 billion in mortgage-backed securities), that possibility can’t be ruled out. Markets might not be pleased by such action, as it would signal that the Fed believes the economy is in need of strong medicine. Also, as both the Fed and the ECB are aware, central bank asset purchases can only do so much for the economy, particularly those areas hit hardest by the pandemic. Buying more bonds, for example, won’t help restaurants that are struggling to stay in business at only 25% capacity.