The calendar year 2020 was unique, to say the least. The COVID-19 health crisis brought the economy to a sudden and almost complete halt, while financial markets experienced a broad-based, severe drawdown. However, the economic recovery has been much faster and stronger than most had anticipated. This is partly because some of the most binding COVID restrictions were temporary—but perhaps more importantly, the policy response was more aggressive than during previous recessions. Markets have rebounded sharply from the March lows and broad stock indexes are back near record highs.
In our view, there remains a wide range of potential outcomes on the path forward—and this uncertainty could lead to market volatility. The intermediate-term economic outlook is largely dependent on the effectiveness and distribution of the COVID-19 vaccine. Our base case assumption is that economic recovery continues and interest rates remain low with ongoing policy accommodation. This backdrop should underpin financial markets and continue to prove favorable for risk assets like equities and credit. However, valuations are a bit stretched, particularly in US large-cap stocks.
In terms of tactical portfolio positioning, we continue to target an underweight position to both core/investment grade fixed income and to US equities. We remain fully invested in more reasonably priced international and emerging markets stocks—and note that new market cycles are often accompanied by a change in market leadership. We also continue to target an overweight position to certain diversifying and credit-oriented alternative strategies. We believe the investment case is particularly compelling given the extremely low yields across most fixed income sectors.
Please see the attached presentation that provides our assessment of the market backdrop and shares our views on portfolio strategy going forward.