Reports and Surveys | August 19, 2021
"A rose by any other name would smell as sweet..." On June 21, 2021, U.S. Fed Chair Jerome Powell noted, “as these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.” A few weeks later, he said about inflation, “to the extent that it is temporary, then it wouldn’t be appropriate to react to it. But to the extent that it gets longer and longer, we’ll have to continue to re-evaluate the risks that would affect inflation expectations.” Most significantly, under the backdrop of a view that inflation is, in fact, transitory, he noted, “There’s still a lot of unemployed people out there. We think it’s important for monetary policy to remain accommodative, and supportive of economic activity, for now.”
Powell’s comments fall under the heading of the monetary policy tool known as “forward guidance.” Back in 2015, the Fed gave us insight into that tool, telling us that it provides communication to the public about the likely future course of policy.
It was John Maynard Keynes who said, “When the facts change, I change my mind — what do you do, sir?” This is how one should interpret the guidance we are now getting from the Fed: We don’t see permanent 70s-like inflation on the horizon based upon everything we know, but we do see stubborn unemployment.
Given that we have had a long period of under-target inflation, we think we can stay accommodative with the expectation that inflation has some room to run while the U.S. economy returns to a more normal employment environment. We continue to take the Fed at its word on U.S. inflation, so easy monetary policy will dominate.
COVID-19, with new variants and new outbreaks, continues to drive economic activity both good and bad. The rollout of COVID-19 vaccines accompanied by strong economic data has driven some positive sentiment. From June to July, many restrictions affecting indoor and outdoor dining, recreation and cultural activities, retail shopping and personal care services were eased. In the past eighteen months, there have been three economic dips corresponding to the three most devastating outbreaks. The latest outbreak is still creating significant headwinds. The global economic recovery is expected to bring continued high demand for commodities and crude, contributing to higher S&P/TSX profitability for the rest of the year and supporting lofty valuations.
We continue to view U.S. equity as a solid performer.
Our bearishness regarding core bonds both within and outside the U.S. is unchanged.
The impact of additional shutdowns from COVID-19 resurgence creates a large unknown for equity markets outside the U.S., particularly in the developed world.
At this stage, we are not compelled to adjust our outlook for any of the alternative asset classes. We have neutral expectations relative to our capital market assumptions (CMAs) across the board, from real estate to private equity.
The Q3 2021 Investment Outlook includes tables that provide a snapshot of our forward-looking observations on the key macroeconomic factors driving markets and the direction of specific asset classes.
We cover these global macro signals for developed markets and emerging markets:
For 24 asset classes, we select one of five outlook signals based on our 12–18 month perspective relative to our 10+-year CMAs. The signals range from an above-normal return outlook to a below-normal return outlook.
The asset classes include equities, fixed income and these alternatives:
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