It was with a distinctive mix of relief and hope that we turned the page on the calendar year, leaving behind a convulsion of health, political, economic, and market disorder that had rocked the world. Barely a week in and the new year hardly seems to have shepherded an abatement to the past year’s chaos and uncertainty.
Nonetheless, as we look past the continuing tragedy of COVID-19, the recent violence in our nation’s capital, and an unprecedented second presidential impeachment, an undoubtedly brighter path forward emerges. The arrival of effective vaccines along with a new administration likely to increase fiscal support for a badly battered economy underwrites our confidence that the second half of 2021 will feel a world apart from the past year. It is with this conviction that we positioned portfolios late in 2020 to overweight risk assets (where the return is uncertain), anticipating the healing before it arrives. Risks remain, as they always do. But now is the time to press any economic and market advantages as the nation and the world accelerates its convalescence.
Specifically, we start the year with an overweight to equities, focusing on U.S. small cap and emerging markets, and underweights to investment-grade fixed income and real assets. We have also recently eliminated gold from our portfolios and returned commodities to a neutral weight.
Politics and policy
With the inauguration, a protracted, historic, and emotional political season will finally draw to a close. Democrats in Georgia have delivered an upset victory to tie the Senate, in turn, delivering to Vice President-elect Kamala Harris the tie-breaking vote, and to Democrats one of the narrowest congressional majorities in history. Back in November, the stock market cheered the prospects of a divided government. Now that the government is not divided but is in fact unified under Democratic control, the market is, well, still cheering. In our view, the continued market momentum owes to two realities. First is the basic fact that the Democratic Senate majority is indeed razor thin and not likely to result in the type of progressive tax policy that would harm an economic recovery before it even gets going. Second, as noted earlier, we expect the new Washington power lineup to result in a material increase in fiscal support. Whether it be infrastructure spending, $2,000 checks, or state and local aid, more government dollars is good for the economy and thus good for markets.
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