We remain constructive on risky assets based on the strong fundamentals that underpin the market: strong global growth, recovery and reopening from the pandemic, strong monetary and fiscal policy stimulus, a strong consumer setup that is expected to unleash pent-up demand, excessive investor fear (see here), and still moderate equity positioning. Our analysis suggests the pandemic could effectively end as soon as next month, due to a combination of vaccination, natural immunity, and seasonal effects (see here). The recent market volatility was largely due to market rotation out of high Momentum and expensive Growth stocks alongside an adjustment in rates and inflation expectations, and should subside going forward.

This year we have already seen a significant reassessment of the global outlook, prompted in part by expectations of substantial and sustained additional US fiscal stimulus. Beyond lifting our 2021 forecasts, the combination of a more rapid than expected reduction of slack, increasing optimism on virus containment, and greater confidence in commitments for sustained policy support suggests that the global economy will sustain its reflationary tilt well beyond this year. We expect the US to be in the vanguard and forecast US nominal GDP to average roughly 7% growth over this year and next.

We maintain our pro-risk portfolio allocation this month, which includes large OWs in Equities and Commodities vs. UWs in Bonds and Cash. We continue to tilt the portfolio toward Cyclical and Value assets, which should continue to outperform as the vaccine rollout spurs a broader reopening of the economy and additional stimulus supports the recovery. We maintain a large Commodity OW, focused in Energy, given our expectation that we have entered a new Commodity up-cycle and as an inflation hedge (see here).