I’m off on Friday so it’s a Wednesday update this week. Our RBC Global Insight Midyear Outlook is now available, I have included more info on that below or you can access it at:
As we approach the market close, the S&P 500 and TSX are both near all-time highs yet market developments may not be top of mind these days. After all, the economy is finally reopening and summer is now officially upon us. We take the opportunity below to reflect on the current backdrop and market narrative which we expect to persist into the back half of 2021. There are risks that need to be acknowledged, but the outlook remains constructive.
The U.S. economic backdrop should remain relatively strong through the course of the rest of the year, driven in particular by the services sector. While the world’s largest economy may see its economic momentum fade at the margin through the second half, it should remain above average. And that is supportive for global equities, which have historically done well in the absence of a U.S. recession.
There is some concern that monetary policy may be on the verge of a change. Historically, rising interest rates eventually restrict the ability of some consumers, households, and businesses to access credit. Those tighter financial conditions have typically resulted in slower economic growth and in some cases, outright recessions. So it is understandable that investors are worried. But the withdrawal of monetary stimulus should be very gradual in nature, and take years to develop. We believe the current environment of favourable financial conditions should remain in place for some time to come. Central Banks globally learned a lot about the withdrawal of monetary stimulus and how markets and economies will react in the years following the 2008/09 financial crisis. I expect they will apply those lessons this time around.
Outside the U.S., the growth outlook has more recently started to improve with a reopening of economies in places like Canada and Europe. This should support the consensus view that global earnings will continue to grow at a double digit pace, helping meet the lofty market expectations that exist.
The predominant risk in most of the world remains the same as it has been for some time: Covid-19. The delta variant is rapidly becoming the dominant strain in many parts of the world, yet cases continue to decline in Canada and the U.S. despite this variant, while the U.K. and Israel are demonstrating the disconnect between cases and deaths/hospitalizations in highly vaccinated populations. Several Canadian provinces have discontinued their daily reporting of data and daily media availability, going to weekday reporting and media availability as needed. This is an important step in allowing people to move on after 16 months of the pandemic always being front and centre. Hopefully we can soon omit the virus update in our weekly emails!
Canada had another week of both declining cases and lower positivity rates. Alberta has now seen a 97% drop in the 7-day average of cases from our peak in May. Ontario has made similar progress, yet oddly remains the most locked down jurisdiction in North America. Infection trends are currently more problematic on the other side of the world. Countries such as Indonesia, Malaysia, Thailand, Russia and South Africa are dealing with growing case trends. Even Australia has implemented heavy handed new restrictions as their Covid-zero approach shows further signs of being unsustainable without a complete ban on all international travel.
We continue to hear about the potential for sustained inflationary pressure as a concern this year. It may remain a source of risk until more evidence emerges that clarifies whether pricing pressures are simply being driven by a combination of supply chain bottlenecks and the reopening phenomenon, or factors that are more durable in nature. It will take some time to gain that level of clarity.
Many developed global equity markets have done quite well year-to-date and are sitting near all-time highs. And while valuations are above average for many, the backdrop of robust growth, double digit earnings gains, and favourable financial conditions remains supportive for stock prices. We are also encouraged by the depth of the global market’s gains this year. More specifically, the strength has not just been tied to one or two groups of stocks, but rather a relatively wide range of sectors and areas which is a sign of a reasonably healthy market advance.
As always, we will monitor development closely and provide thoughts on anything noteworthy. We wish you a healthy, safe, and enjoyable summer, and a terrific Canada Day holiday!
Andy, Sacha & Mike
As the global economy continues to recover in 2021, there are a number of catalysts for investment portfolios that will be important to keep top of mind throughout the rest of the year.
Based on the views from our on-the-ground analysts and strategists around the world, this special 2021 Midyear Outlook provides RBC Wealth Management’s insights on the economy, equity and fixed income markets, currencies, and commodities.
Full report: 2021 Midyear Outlook
Global equity: Green light for economy and markets
As we enter H2 2021, all signs point to a continued economic improvement and no recession in the immediate future. Although a correction is always possible, we don’t view one as inevitable.
Global fixed income: The event horizon
The prospect of the Federal Reserve tightening monetary policy has swung back into view, prompting market volatility and raising concerns about support for the global recovery. Will the Fed’s policy moves encourage global central banks to follow suit?