The most significant factor in the near-term outlook is the impact of reopening the economy. If there is an unacceptable continuing acceleration in infection, regardless of government policy, people will react, and economic activity will stall. Thus far, the economic evidence has signaled a more optimistic outlook.
Other risks will play out over time, but in the near term, one should not underestimate the power of central bank policies on the economy. Also, both monetary and fiscal policy makers have been following the “play book” that came out of the financial crisis of 2008. They have strengthened the specific policy measures to great effect.
We remain cautiously optimistic that the policy steps taken have been and will continue to strongly support economic growth, barring a severe resurgence in the pandemic.
Generally, stocks are priced on the high side of the spectrum relative to their earnings, particularly in the context of the uncertainties caused by this unprecedented environment. The U.S. markets, particularly defensive sectors, remain “rich” relative to value, cyclical and small cap sectors.
However relative valuation alone isn’t enough to downplay the defensive, stable growth sectors of the market. They remain highly valued given their superior operating performance and business characteristics that have proven to be durable and successful in an environment of uncertainty. Value, small cap, and international markets are leveraged to a sustained acceleration in economic growth.
There are some intermittent signs that these sectors may deserve more exposure in portfolios, but additional evidence is necessary to validate continued rotation into these economically sensitive areas.