We partner with Wilshire, one of the nation’s largest investment research consultants, to bring you investment information and market insights. Each quarter in The Macro View, we summarize Wilshire’s viewpoint on the macroeconomic landscape and the asset classes that may make up the core components of your investment portfolio.
What’s macroeconomics, you ask? It’s the study of large-scale or general economic factors, such as interest rates and national productivity. Let’s dive into the latest quarter.
There’s signs of global growth but also inflationary pressure
Global securities markets continued to benefit from growing optimism as higher COVID vaccination rates and declining cases are increasing confidence in the reopening of global economies and higher earnings growth, particularly in the US. First quarter global economic data pointed to a significant recovery, leading economists to upgrade forecasts of global growth for the year. Economic data continues to improve for both services and manufacturing, with higher-frequency indicators showing an increased degree of mobility and activity, thereby supporting further demand for the consumption of services which helps to drive economic growth and recovery.
Despite the uptick in global demand and manufacturing, there are some indications of supply chain disruptions. While such effects could prove to be temporary, there has been a substantial rise in wholesale prices, which serves as an indication of pending inflationary pressure. Recent measures of core inflation are also elevated, particularly in the services sectors, and the potential for a rise in the velocity of money coinciding with an increase in the money supply is further supportive of inflation.
There may be some offsetting factors to this inflationary pressure, and investors should be cautious not to overreact to the shorter-term headline impacts from the base effect of comparisons to last year’s very low prices. Nevertheless, the risk of inflation should not be overlooked.
What’s the outlook for investors as the economy recovers?
In this quarter’s Macro View, Wilshire takes a deeper dive into the following:
- Health of the US consumer
- Pending recovery in the consumption of services
- Underlying indications of rising core inflation
- Interest rate expectations
- Equity valuations and technical factors
Because of interest rate risk, you might want to consider a lower exposure to core fixed income in favor of more flexible/alternative mandates that exhibit less duration exposure (shorter term fixed income or even equities).
Given the dramatic narrowing of credit spreads over the past year, Wilshire moved to a neutral position in credit vs. government bonds during the first quarter and remains neutral in portfolios today. Wilshire continues to favor emerging markets and US value equities, which are likely to benefit from a pro-cyclical/post-recessionary environment, while US growth equities are more likely to face relative headwinds from rising interest rates in the future.
The magnitude of the low-quality rally since the spring of 2020 may indicate that the early cycle recovery and rally may be behind us and there are likely better days ahead for high quality companies. As the economy begins to exit its early-cycle recovery and enter the mid-cycle, markets are pricing in lower volatility for equities and higher volatility for fixed income/interest rates. Investors should not dismiss the relationship between interest rates and equity valuations, as higher rates and tighter monetary policy could also trigger higher equity volatility. Therefore, Wilshire continues to promote diversification and remain judicious in the allocation of their active risk budget.
Asset class perspectives — MoneyLion portfolios
We’ve summarized Wilshire’s Q2 2021 viewpoint on the core components of MoneyLion members’ investment portfolios:
Fixed income vs. equity
Despite a positive economic outlook, which would normally be expected to benefit equities coming out of a recession, valuations are not materially more attractive in equities vs. fixed income, resulting in a neutral posture.
Large cap vs. small cap equities
Wilshire recognizes that small caps are likely to benefit from an economic recovery, however given the dramatic level of recent outperformance in small caps, they believe that the early cycle recovery may be ending, as evidenced by the outperformance of low-quality companies.
Growth vs. value equities
US value equities offer more attractive valuations and are expected to be the primary beneficiaries of a material recovery in earnings in 2021, particularly in Industrials, Materials, and Financials. On the other hand, US growth equities are likely to face relative headwinds from higher nominal and real yields in the future. Therefore, Wilshire maintains their overweight view in value equities.
Global ex-US vs. US equities
Despite somewhat attractive relative valuations in non-US developed market equities, the US continues to outperform its foreign counterparts in vaccinations, which has led to lower COVID cases and is supportive of a faster reopening and higher economic growth. Given the balance of the factors noted above, Wilshire is remaining neutral.
Emerging markets vs. developed equities & US
Emerging economies are forecasted to deliver somewhat stronger economic growth in 2021 and have historically outperformed coming out of recessions. Furthermore, as economies re-open and global growth rebounds, emerging markets will be a primary beneficiary of increasing consumer demand and manufacturing capex cycles. Therefore, Wilshire maintains their overweight view in emerging markets.
Macroeconomic outlook: Multi-year global expansion underway
First quarter global economic data pointed to a significant recovery, leading economists to upgrade forecasts of global growth. The IMF recently increased its expectations for global growth to 6.03% and 4.42% in 2021 and 2022, respectively (Exhibit A). This increase is largely attributable to higher growth expectations in the US, where COVID cases have declined rapidly and the services sector is beginning to show signs of a strong recovery relative to other foreign developed economies, as shown in the Services PMIs (purchase managers index) in Exhibit B. Personal consumption has continued to trend higher in 2021 on the heels of demand for durable goods, however services are likely to drive the next move higher in consumption (Exhibit C). Both are positive spending trends which help growth and economic activity.
Exhibit A: IMF forecasts strong real GDP growth*
Exhibit B: Services PMIs continue to improve*
Exhibit C: Consumption of services to drive growth*
Macroeconomic outlook: US manufacturing recovery gaining momentum
Global manufacturing PMIs have also continued to stage a V-shaped recovery, with all of the developed world still signaling expansion (above 50). US manufacturing remains at elevated levels, and European economies are seeing a surge in manufacturing sentiment, with PMIs above 60 in the Eurozone, most notably in Germany. This is generally a good sign of demand and an improving economy as companies are spending money and growing productivity which helps contribute to overall economic growth.
Exhibit D: Global manufacturing PMIs signals very positive sentiment*
How did consumers, CEOs and small businesses view the markets?
- CEO confidence has remained relatively elevated throughout this crisis, which is not surprising given underlying divergences in the economic recovery and that CEOs are likely more in tune with economic conditions/indicators and better able to look through short-term conditions. As discussed in our last quarterly letter, CEO Confidence had nearly fully recovered within two years following the depths of the global financial crisis.
- Consumer sentiment took much longer to recover (Exhibit E). Consumer sentiment has started to improve and this trend is likely to gain momentum as the economy reopens.
- Small business optimism, which was more directly impacted by the forced closures of food and beverage accommodations, will likely also recover quickly as these surviving establishments continue to reopen.
Exhibit E: CEOs more confident than consumers*
The early cycle market recovery may be behind us, and the future looks bright for high quality companies. But investors should consider the potential for rising core inflation. As Wilshire points out, it’s good investing behavior to keep a diversified portfolio, which MoneyLion members can maintain by choosing one of seven options based on their risk preferences. Additionally, investing on a recurring basis using Auto Invest allows MoneyLion members to stay consistent through macroeconomic developments without attempting to time the market.
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