Eye on the market outlook 2021
The Hazmat Recovery
Michael Cembalest
Chairman of Market and Investment Strategy
for J.P. Morgan Asset & Wealth Management
Jan 1, 2021
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The Hazmat Recovery
In response to the worst pandemic in 50 years and a country at war with itself over lockdowns, individual freedoms and election results, the Fed and Congress airdropped an unprecedented amount of stimulus with vaccine airdrops to follow. That should be enough for markets to rise again in 2021 as pent-up activity is unleashed, and since the bill for stimulus is shifted to future generations. Whether this solves any of the other issues is a different story. Our 2021 Outlook reviews these topics along with deep dives on China, Europe, Emerging Markets, tech antitrust issues, gold and the rapidly shrinking portfolio choices for yield-oriented investors.
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This Year's Special Topics
US-China economic conflict: lower intensity, but here to stay
Import competition from China has played a recent role in US election patterns. As a result, US concerns about Chinese mercantilism and human rights are likely to impede rapid normalization of US-China economic relations.
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US-China military conflict: the balance of power has changed
China is close to military parity with the US in the greater China region, reducing the likelihood of actual conflict.
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The pending global investor underweight to China
At the same time that US-China trade and military conflicts are intensifying, China’s financial opening is increasing its weight in diversified equity and fixed income index products.
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Why does the US equity market keep outperforming Europe and Japan?
The song remains the same: US equities outperformed Europe and Japan in 21 out of the last 28 quarters. We explore the reasons why.
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What are negative policy rates doing to European banks?
Nothing good. A warning to the Fed from the European experience.
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Emerging markets:
a trifecta of value
Emerging markets offer a trifecta of value when looking at equity valuations, exchange rates and balance of payments risks.
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Antitrust enforcement: coming to a tech company near you
After a 25-year decline in antitrust enforcement and the most concentrated markets since the late ’60s, the wagons are circling.
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Fallen angels and hybrid investments in diversified portfolios
At a time of financial repression, fallen angels and hybrid investments may be the last resort for yield oriented investors.
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Gold rally: modest so far
Gold rallies are rare, but when they happen the gains for investors are multiples of the 80% rally seen so far.
US federal debt increase is probably permanent
It would take the largest tax increases or spending cuts in the post-war era to bring US Federal debt back down to pre-virus levels.
COVID vaccines
The US Advisory Committee on Immunization Practices has prioritized healthcare and nursing home workers in Phase 1a as Pfizer and Moderna vaccines are rolled out. Given projected vaccine production schedules, that process could immunize all US healthcare workers by early January. Phase 1b targets essential workers (teachers, agriculture, police and fire) over the next 10 weeks, and Phase 1c targets the elderly with high risk medical conditions over 10 weeks as well. If so, Phases 1a–1c would be completed by June.
US money supply growth is 2.5x larger than after the Global Financial Crisis, and emergency liquidity facilities were delivered much faster. So far, the Federal Reserve has provided $2.4 trillion in support through asset purchases, liquidity measures and emergency lending facilities out of $7.3 trillion in potential support.
Liquidity provided by the Federal Reserve
Congress has delivered over $2 trillion in fiscal support so far, driving the projected 2020 fiscal deficit to 16% of GDP, the largest deficit since 1945. The deficit in 2021 is projected to be 8.6% of GDP; between 1946 and 2019, the deficit has only been larger twice.
Liquidity Provided by Congress
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