After an unprecedented year, investors can expect an equally unmatched economic and market recovery. Fundamental Equities CIO Tony DeSpirito discussed the potential implications with former FOMC member William Dudley.
No one could have foreseen or planned for the onslaught of a global pandemic and the human and economic toll it would extend. But as vaccines begin to reveal a light at the end of the COVID-19 tunnel, experts across disciplines are debating and preparing for what the future may hold.
In that spirit, Tony DeSpirito, CIO of U.S. Fundamental Equities, hosted a virtual sit-down with U.S. Economist William C. Dudley, former NY Fed President and vice chair of the Federal Open Market Committee, to discuss the outlook for the U.S. economy and stock market.
The conversation was far-reaching and can be viewed in full here. One of the key messages: Expect a recovery as unusual as the crisis itself.
One thing the two quickly agreed on: There is no historical analogy for what we’ve just experienced. They also suggest there is potential for the economy to come roaring back faster than many expect.
Monetary policy is on its “maximum stimulative setting,” with fiscal policy also on “full throttle.” A key question, according to Mr. Dudley, is how quickly unemployed Americans can get back to work:
“The goal, quite frankly, is to try to get the 9.5 million people that are still out of work back to work quickly because this pandemic has been very uneven in terms of its impact on people and households.”
If it happens fast, that is clearly good news. The flip side is that it also means the policy regime could turn much more abruptly than it did after the Global Financial Crisis (GFC) of 2008.
The uncommon nature of the recovery means there is a lot of guesswork in estimating when full employment might be achieved. But Mr. Dudley says it could be fast, primarily because the forces restraining the economy are somewhat artificial: “It's a pandemic. And if the pandemic goes away, then the economy should come bouncing back.”
“Investors are wise to prepare for what could be a quick turn - and not rely on the GFC aftermath as their template.”
The investment playbook
The uncertainty around how quickly the economy could turn raises questions for investors about how to position their equity portfolios.
“I think there's clearly an early cycle playbook, and there's a late cycle playbook,” Mr. DeSpirito explains. In early cycle, investors would tend to buy cyclical value stocks. This is what is broadly happening now, as these types of stocks have outperformed since the announcement of effective vaccines in November of last year.
Later in an economic cycle, Mr. DeSpirito says, investors would be more inclined toward growth stocks, bond proxies and high yielders, as well as “stability” stocks.
The two agree that the cyclical reflation playbook appears to be the right one for now. Mr. Dudley sees a strong cyclical earnings recovery in the second half of this year and the first half of 2022.
“But,” he says, “we may have finished that by the middle of 2022. And at that point, people might start to worry about running out of resources, that the Fed's going to ultimately have to tighten. They might have to tighten by more than they have in the past. And at that point, the cyclical story is going to be over.”
Investors are wise to prepare for what could be a quick turn, and not rely on the GFC aftermath as their template. This transition, Mr. DudIey suggests, is going to be much more compressed in time.
One key takeaway from the compelling conversation: In an environment unlike any before it, forecasting must be undertaken with a big dose of humility.
For Mr. DeSpirito, this only reinforces the case for active management: “We're in uncharted waters. And it's going to be really important to be forward-thinking and active.”
Visit BlackRock Fundamental Equities’ Expert to Expert portal for the full episode of “An investor’s guide to an unprecedented recovery.“
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