During the year 2020 we saw the global economy fall into its deepest recession in the postwar era due to COVID-19, with the S&P 500 falling by as much as 34% from its late February highs into late March. But as early as the second quarter (Q2), the economy began to show signs of recovery and the stock market responded, surging nearly 70% from its March low to finish the year up 20%.

The economic recovery gets much of the credit for the market’s gains, as does a federal stimulus package, massive amounts of liquidity from the Federal Reserve, and the rapid development of multiple COVID-19 vaccines. Investors seemed encouraged that the pandemic wouldn’t trigger a more severe financial crisis due to the Federal Reserve, which took swift and wide-ranging action to stabilize markets, including new quantitative easing (QE) measures and backing loans to keep businesses afloat. Additionally, in late March, Congress passed a $2.2 trillion stimulus package to put money into the pockets of Americans and offer relief to business owners, while positive trial results of several vaccine candidates in the fall promised an eventual end to the global pandemic.

Because of those measures global stocks are entering 2021 in a broad uptrend, anticipating that re-openings and continued central bank accommodation will support a robust global economic recovery later in the year. Potential winners in the continued recovery scenario include small-caps, cyclical Value sectors, and Clean Energy. As the year progresses, the two major considerations will be earnings and interest rates. Yield curves are likely to steepen as long-dated yields move higher on the back of a continued global recovery and increased inflation expectations. If stock investors see continued earnings growth and rising yields as a positive economic sign, then the correlation between stocks and yields will remain positive. But if yields rise so much that stock investors see the rise as a threatening sign of rising inflation expectations and chocking off the earnings recovery, the chances will increase for a more significant correction to stock prices. We see that scenario as a risk more likely in the second half of the year, however.

A recovery that’s “too cold” with deflationary disappointments or “too hot” with inflationary surprises, would cast doubt on the survival of the cyclical bull as well as the secular bull that started in 2009. An expansion that’s “just right” would support their continuation. As always, we will continue to monitor the developments and make any adjustments in accordance with our risk-adjusted portfolio models.