While unlikely to rock the markets likes March, 2020, the impact of people returning to the office presents a new scenario
The resiliency of the stock market continues to impress – even as the Delta variant sparks a new wave of infections in the U.S. and across Europe.
Maybe it’s a case of vaccination levels reassuring investors or maybe it’s the fact more lockdowns seem unlikely. Either way, protocols around the virus are set to be less prohibitive to economic growth moving forward.
Kevin McCreadie, CEO and CIO at AGF Management Limited believes markets have also been bolstered by another positive earnings season, while the U.S. Federal Reserve appears to have quelled fears that it will raise rates anytime soon or that tapering of its bond-buying program is inevitable at this juncture.
However, McCreadie said that for all of equities’ ability to continue to perform in this environment, people’s return to work in this “new normal” presents different problems. And while he doesn’t think markets will be as nerve-shredding as they were in March, 2020, the new risks could be significant.
“If stocks continue their ascent from here – and we believe they can – they will likely do so in a much more volatile fashion than perhaps investors have grown accustomed to in recent months,” he said.
“As we move into the fall, we will get a better handle on the firmness of the labour market and a better feel for what ‘normal’ means, while we also make adjustments to Covid-19 variants and the potential of booster shots to keep economic activity churning higher.
“Earnings will likely grow from here but at a slower pace from this most recent quarter: a fact that markets will grapple with as we head toward 2022. It’s to this end that AGF’s Asset Allocation Committee continues to maintain an overweight position in equities, versus fixed income, alongside a moderate cash allocation to mitigate the potential impact of greater volatility and provide liquidity should tactical opportunities arise.”
He also recommended “barbelling” equity portfolios with exposure to both high-quality growth and value stocks as well as some type of equity hedging strategy, which can help mitigate volatility even further. Meanwhile, fixed income rates around the world are pricing in a much greater economic slowdown and discounting the prospect that inflation sparked by the reopening may be more sticky than central banks believe.
McCreadie added: “We may experience stagflation as we move into 2022, creating volatility in bond prices which, at these low levels of rates, do not provide an adequate cushion to protect from the decline in bond prices that could occur if rates do move higher from here.”
On top of that, despite headline “tops”, the CEO pointed to significant rotation over the past two months that speaks to a certain amount of anxiety creeping into markets. Since mid-May, Bloomberg data shows the S&P 500 Growth Index has climbed close to 15% and the Nasdaq 100 is up almost 16%, while the S&P 500 Value Index is up just a little more than 1% over the same period.
He added: “In other words, the style of investing that tends to do well in a backdrop of slowing economic growth is now surging, while the style most synonymous with the early stages of a new economic cycle is waning.”
