The economy is reopening, which is good news for markets. But the S&P 500 is already up roughly 87% as of 4/16/21 from the pandemic low on March 30th. While there is room for further gains from here, they will need to be justified by improving economic conditions – which comes with its own costs and market concerns. Investors should stay in the game but expect earnings fundamentals to play a more prominent role in outperformance. 

Growth rebound

Since positive vaccine announcements in November allowed for reopening hopes, the outlook for growth has improved almost everywhere in the world—particularly in the United States and stocks have rallied significantly. Analysts now estimate that the economy will grow significantly above trend in 2021 and 2022—returning to pre-pandemic levels of output and raising questions of overheating.

We believe that the bull market can continue as expectations make their way to reality and earnings growth improves, but moving forward, market gains will more likely be anchored to economic data. As market dynamics shift and new risks rise, volatility is liable to remain elevated. Those looking to generate alpha must therefore identify areas of earnings growth—driven by a “return to normal” and changes in the policy environment.

Looking beyond Biden’s first 100 days

The path for the markets and for the economy has been and will continue to be defined fiscal and monetary policy. Investors should monitor developments therein for clues to fundamental improvements and flows across sectors and asset classes.

The Biden Administration set its sights on an ambitious infrastructure agenda. The plan goes well beyond fixing bridges and roads, however; it includes investments in green and renewable technologies, the “care economy,” regulatory frameworks, and redistributive policies.

Government spending, and particularly investment in productivity-improving areas, should be good for the economy and for investments. But that spending has its downsides.  Taxes are likely to rise to finance much of this government investment. We believe that this would create a short-term fiscal drag, which could be moderately market negative as it is immediately priced into markets while the benefits of infrastructure spending will be felt over years.

Perhaps more important for the path of markets comes from the federal reserve. While inflation risks are to the upside, the Federal Reserve is focused on full employment. Therefore, we believe policy is unlikely to shift until the labor market heals and wages begin to rise—likely 12-18 months away. 

Bottom line

Recovery years are notoriously difficult to invest in. A supportive policy environment means suggests investors need not significantly shift investment strategy. Stay invested. That said, a tactical leaning into or out of asset classes based on relative valuation, policy path, and the strategic direction of interest rates may be best. 

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

Alpha is an investment strategy's ability to beat the market, or it's "edge." Alpha is thus also often referred to as “excess return” versus an index or investment benchmark.  

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that seeks to measure a company’s impact beyond traditional financial metrics.

Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index or target return.

Green investing is a form of socially responsible investing where investments are made in companies that support or provide environmentally friendly products and practices. These companies encourage new technologies that support the transition from carbon dependence to more sustainable alternatives.

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