Many people have been wondering what the economic recovery in the United States will look like. But Omar Aguilar, chief investment officer (CIO), passive equity and multi-asset strategy for Charles Schwab Investment Management, said the recovery started in the fourth quarter of last year, as soon as news emerged about coronavirus vaccines.
“The question is: How quickly will the vaccines be administered so that the economy can open up?” Aguilar said at a webinar on Schwab CIOs’ investment outlook for the coming year. “That speed will determine the shape and strength of the recovery. The other main, pressing question is how inflation will play out in a continued low interest rate environment.”
Aguilar said the U.S. economy will continue to face both headwinds and tailwinds in 2021, with the four largest headwinds being the “contraction of the service sector, the slowdown in consumer spending, continued lockdowns and unemployment.”
Still, Aguilar said, there are still a lot of positives. “The manufacturing sector continues to be very strong, not just in the U.S.,” he said. “The stimulus will provide more liquidity, and accommodating policies from central banks will provide access to the markets. The bigger question is the size of the stimulus and the tax plan of the incoming Biden administration. Those two factors could affect earnings because it is a question of what kind of liquidity they will bring to the markets.”
As to which areas of the market Aguilar expects will perform well this year, he points to “equity market rotation translating to cyclicals, emerging markets and ESG [environmental, social and governance investing], away from large-cap and defensive stocks.”
Brett Wander, CIO, fixed income at Charles Schwab Investment Management, said that while there are continued challenges for fixed income, notably low interest rates and inflation uncertainty, he believes there still is a place for fixed income in portfolios in 2021.
“Ten-year Treasury yields are now at 110, 115 basis points [bps], up from 80 basis points last year,” Wander said. “Democrats taking over both houses of Congress, as well as the presidency, will lead to more stimulative economic policies. We will also be keeping our eye on the vaccine and the prospects for its fast dissemination.”
As to whether Treasury yields will break from the narrow range in which they were trading last year, Wander said, “maybe, but only a little bit. The Federal Reserve is probably comfortable with where yields are now as we only expect a slight increase in inflation, to hover at around 2%. Thus, the real yield on Treasuries will be negative 1%. That is lower than where they normally would be, yet we expect the Fed to keep rates very low, at least for a couple of years.”
Wander advises that investors move only modestly into corporate bonds.
Bill McMahon, CIO, active equity strategies at Charles Schwab Investment Management, said investors looking to generate income should move into “dividend-paying sectors of the market. This year, we think they will return to basics. Look for companies with strong and growing dividends. While 2020 favored companies that benefited from lockdowns, the time is now to look to cyclical companies that will benefit from a return to normalcy.”
McMahon added: “Individual stock selection will be more important this year than last.”
Three sectors he expects will perform well in 2021 are energy, financials and technology. “There will be some opportunities in these three areas as the year unfolds, but investors need to be particular,” McMahon said. “Don’t take a broad-brush approach.”