Global CIO video: "It is unlikely that the US economic recovery will end anytime soon."
As we know very well, the pandemic has not only upended many areas of life, but also led to extremes in financial markets and economic data. The former have seen volatility pick up in recent weeks, and the latter have been highly erratic.
While US inflation, for instance, has surprised to the upside – raising fears that the Federal Reserve might tighten policy sooner than expected – the latest US labor market data provided a considerable downside surprise. Our economists refer to such surprises as "foggy" data resulting from last year's sharp downturn.
In foggy conditions, it is best to go a little more slowly and keep a steady hand, which essentially was the consensus of our latest Investment Committee meeting. Though we believe that economic and earnings growth will prove robust while the inflation spike recedes, bullish sentiment and elevated risk-taking by investors point to a heightened risk of temporary market setbacks. Maintaining equity allocations at strategic levels seems the most prudent stance in such an environment. However, we retain a cyclical tilt in portfolios by adhering to our successful overweight in commodities (also as a good hedge against rising inflation expectations) and underweight in government bonds.