To be clear, the pandemic isn’t over. But optimism is on the rise.
The economy is improving. COVID-19 vaccination rates are increasing. Hospitalization rates are decreasing in communities across the U.S.
So there’s a common question among investors – as well as people who may have sat on the investing sidelines while the economic uncertainty of the last year played out. That question: What’s next for the economy – and the markets overall – as the recovery moves forward?
Alan McKnight, chief investment officer for Regions Asset Management, recently joined national radio host Chuck Jaffe on the Money Life financial program to share perspectives. Here are four key takeaways.
1. The confluence of the markets and the economy is happening now.
“Everyone wants a simple story of where we are, but we see a confluence of the markets and the economy syncing up,” McKnight said. “People are starting to invest in the cyclical sectors like energy, financials, and industrials with the belief that the economy and the stock markets are beginning to sync up.”
In other words – as the economy rebounds, McKnight and others expect certain sectors benefit and rebound as well. Individual investors can speak with an advisor about what types of investment opportunities may make sense for their portfolios.
Bottom line: While things are headed in a positive direction, there’s still uncertainty. An advisor can help you plan ahead with a clear strategy.
2. Stock are still profitable, albeit not to the level many saw in 2020.
“We aren’t going to see excess returns that we saw last year when we saw the S&P 500 over 18%,” predicted McKnight. “We aren’t expecting that kind of return coming out of stocks in 2021, but stocks can still do well this year. While earnings will continue to improve over the course of the year, we do not expect to see the type of spectacular market returns we saw last year coming out of the pandemic related downturn in March.”
Bottom line: Stocks still have room to grow, but probably not at the same rates as seen in 2020.
3. Higher prices have an impact, even if official inflation figures remain low.
“The bond market and interest rate structure are already forecasting higher inflation and planning for it,” McKnight told Jaffe.
In recent years, inflation has been quite modest. But more people are starting to notice higher prices, whether it’s on the cost of construction materials or durable goods – everyday purchases.
“Our view is that if you continue to see commodity prices going up, rents going up and wages going up, you’ll ultimately see the impact of inflation and interest rates continuing to rise,” McKnight said.
Bottom line: Don’t be surprised to see higher prices for things in 2021. Overall, the cost of rising interest rates is still low, historically speaking.
4. How do investors generate income in 2021?
Broadly speaking, McKnight does not expect the bond market to get much more favorable this year. Bond yields are still historically low with little improvement.
“It is difficult for the average investor trying to find yield and income right now that don’t come with risk,” he shared. “If you invest more in bonds, you risk rates going higher. On the equity front, chasing yield will create risk when you have drawdown in the equity market.”
Bottom line: If you are looking to invest right now, you must determine how much risk you are willing to take and know the amount of money you need for day-to-day living.
Additional insights from the interview are below.
Regions Wealth Management offers customized financial insights for clients. To connect directly with a Regions professional about your individual questions and goals, click here.
For more insight, McKnight and Regions’ team of investment professionals offer a weekly commentary for investors at this link.
The commentary expressed are statements of the Speaker(s) opinion, are intended only for informational purposes, and are not formal or binding opinions of Regions Bank, its parent company Regions Financial Corporation, or its subsidiaries. This content is solely for information and educational purposes, and nothing contained in this article constitutes an offer or solicitation to purchase any security, the recommendation of any particular security or strategy or a complete analysis of any security, company or industry or constitutes tax, accounting or legal advice. Information is based on sources believed to be reliable but is not guaranteed as to accuracy. Commentary and opinions provided reflect the judgment of the Speaker(s) as of the date of this article and are subject to change without notice. Certain sections of this article may contain forward-looking statements based upon the reasonable expectations, estimates, projections and assumptions of the Speaker(s), but forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which are difficult to predict. Investment ideas and strategies presented may not be suitable for all investors. No responsibility or liability is assumed for any loss that may directly or indirectly result from use of information, commentary or opinions. This information is intended for the use of Regions’ clients and associates and is not intended for further distribution.