Consensus is rapidly forming that it will be the U.S. that will lead the world out of the corona pandemic into a period of resurgent economic growth. U.S. mobility and engagement measures are already increasing (ahead of herd immunity), indicating that activity is picking up several months earlier than expected.

This rise in mobility will be greeted by the fiscal stimulus passed in December and not yet distributed, in addition to the just passed $1.9 trillion package. The graph below highlights the significant difference in speed and magnitude of the U.S. fiscal response to the pandemic versus the reaction to the Global Financial Crisis of 2008. The U.S. received a significant fiscal boost in March/April of 2020 that resulted in income growth during one of the deepest economic declines in history. The fiscal boost in 2021 will be even larger and comes at a time of increased activity and falling unemployment. Growth in the near-term is set to surge. Strategas, one of the leading U.S. sell-side macro forecasters, this week raised their 1Q U.S. real GDP estimate to 10% vs. 5.5% previously, to factor in the quick distribution of funds and return of activity in the data.

The continuing rise in global bond yields, particularly in the U.S., is entirely consistent with rising forecasts of economic growth. What we find more interesting is the seeming reluctance of sell-side forecasters to embrace the potential for a significant further rise in yields. As the graph below highlights, currently there are only 3 out of 50 sell-side forecasters expecting rates to finish above 2% by year-end. A consensus seems to be forming that rising growth and inflation expectations will prove only temporary, and global activity will rather quickly return to the old norm of low growth with no inflation. We question whether this consensus will hold as the read-out of strong economic numbers and rising inflation statistics builds during the coming months.

The ingredients are in place for rising volatility in financial assets. The tug-of-war has already begun between improving economic growth and corporate earnings, on the one hand, and rising bond yields and normalising valuation multiples, on the other hand. In fact, this is the normal pattern when emerging from equity bear markets caused by economic contraction as highlighted in the table below. March 23^rd will mark the anniversary of the 2020 market low. Historically, the second year of a market recovery leads to above average returns but, as can be seen in last column of the table, these returns also come with sizeable drawdowns that have averaged -10% since WWII.

We expect that the combination of earnings growth and normalised valuation multiples will continue to favour the Value segments of the market. Value stocks have entered 2021 with sizeable valuation discounts to the more popular Growth stocks despite consensus expectations showing far stronger earnings growth over the next two years. The table below shows that year-to-date returns are almost a mirror image of the 2020 performance outcomes with Energy and Financials leading the way. Of note to us, is that the early stages of this ‘rotation’ have seen investors exit the more defensive segments of the market in an effort to raise their exposure to cyclicality. As yet there is little evidence of a major exit from the darling of Growth sectors – technology. After years of outperformance the popularity of this sector is deeply ingrained in investor bias. We suspect it will take higher bond yields, that add to the pressure on stretched Technology valuations, before investors seriously question their exposure to this sector.

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