In a recent webinar, Franklin Templeton experts discussed how the U.S. vaccinating its workforces and a post-COVID-19 economy will affect the markets.
Mark Lindbloom, a portfolio manager at Western Asset Management, said the market should be dived into two sections for analysis: the short term and the long term. In the short run, Lindbloom said he anticipated inflation would rise due to prior worries of deflation at the onset of COVID-19 that spurred an influx of federal stimulus money. In a secular market, he questioned whether fiscal spending will lead to higher inflation rates.
“With COVID-19 hopefully diminishing, there is some possibility that we’ll see that inflation moving higher,” he said. Lindbloom expects inflation numbers will be well in excess of 2%.
Gene Podkaminer, head of research at Franklin Templeton Investment Solutions, predicted multi-asset portfolios will continue seeing low interest rates in the near future. With low rates, policy allocation and fiscal spending will play an even greater role in inflation, he said.
Podkaminer said the recent surges in Bitcoin and cryptocurrency led many to worry about inflation and question whether such currencies can be a good source of value for investors. However, Podkaminer likened Bitcoin to other sources of value that do not necessarily increase inflation. “Historically, you look at gold and other reserve currencies as value that can help you,” Podkaminer said. “But I’m not sure if in this evolution, we can pound our fists and say they are great inflation hedges.”
Lindbloom pointed out that not all market changes are related to inflation, and that sometimes returns are difficult to predict. For example, many financial experts anticipated low returns in the market for 2020. Instead, both the Dow Jones Industrial Average and S&P 500 closed at all-time record levels at year’s end. “Not one of us said that 2020 would be a great investment year,” Lindbloom recalled. “We did see that, but we didn’t think that with all that was happening.”
Other experts on the panel discussed whether equity investments are a soluble replacement for fixed income. Michael Clarfeld, managing director and portfolio manager at ClearBridge Investments, said both offer very separate return and risk profiles. Because equities are invested into the stock market, they are more likely to have more risk than fixed-income bonds, which provide modest returns.
“Clearly there is a volatility difference between equities and fixed income,” Clarfeld said. “If we are truly entering into a rising rate world, more inflation, etc., I do think that it makes sense for investors to think more realistically about where that income comes from.”
Podkaminer suggested advisers ask investors what they anticipate from their portfolios. “How do I maximize the income levels in my portfolio when generating risk?” he said they should ask. “Investors need to be clear on what their objectives are.”
As the markets start looking toward rising numbers of vaccinations and the possibility of a renewed economy, Clarfeld forecast there will be more energy production within the United States. American energy corporations, including the Williams Co. and Pioneer Natural Resources, continue to be large-cap companies with stable and predictable cash flows, he said. Even as energy stocks have been stuck in a bear market with increased pessimism throughout 2020, Clarfeld expects this to change throughout the year. “Investors will come back to these areas as they realize the pessimism is overdone,” he said.