Looking at both nominal and real interest rates from 1958 through the present, interest rates have been falling for the past 40 years, leaving both real and nominal yields historically low. However, as inflation moves higher, yet nominal yields remain range bound, real yields could continue to come under pressure.
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Value looks attractive relative to growth from a valuation standpoint, and remains cheap even as the rotation into value has already begun to materialize. Moreover, earnings for cyclically-orientated value sectors tend to be more sensitive to the real economy (RHS). In fact, 3 of the 5 sectors in which earnings are most sensitive to the economy are value sectors. With this in mind, as the economic recovery continues, value may be well poised to deliver strong returns.
Market corrections are not infrequent occurrences, but the source of that volatility and correction is constantly in flux. However, over time, volatility subsides and equity markets resume their upward ascent.
Differing regional responses towards pre-vaccine lockdowns and current vaccine distribution plans have, in part, driven equity performance. For example, China’s strictly enforced lockdown strategy allowed the region to recover from the pandemic well before other economies in 2020, leading to equity outperformance relative to other regions. Since the announcement of successful vaccine candidates, however, economies with more cyclical exposure that should benefit from the recovery have begun to outperform.