MACROECONOMIC HIGHLIGHTS - Q1 2021 - WESTEND ADVISORS
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Macroeconomic
Highlights
Q1 2021Table of Contents
WestEnd Outlook Highlights………………………………………………………………………………………… 2
U.S. Equity Sector Allocations………………………………………………….…………………………………… 3
U.S. Economic & Market Backdrop
U.S. Economy: Sharp Rebound Matches Severe Recession………………………………………………………… 5
U.S. Economy: Recovery Sharper Than 2009………………………………………………………………………… 6
Consumer Strength: Wage Gains and Stimulus Produced Record Savings………………………………………… 7
Consumer Strength: Spending on Goods Driving Consumer Recovery……………………………………………… 8
COVID-19 Trajectory: Vaccine Efficacy Sets Path to Herd Immunity………………………………………………… 9
Earnings Growth: Prospects Vary by Sector in Economic Recovery…………………………………………………10
U.S. Equity Valuation: Reasonable in Context…………………………………………………………………………11
U.S. Equity Valuation: Expect Falling Multiples on Rising Earnings as is Typical Early in a Cycle…………………12
U.S. Sector Outlook
Industrials: Positioned to Benefit from Recovery………………………………………………………………………14
Financials: Fiscal Support Should Limit Loan Loss Provisions………………………………………………………15
Energy: Demand Recovery in 2021……………………………………………………………………………………16
Consumer Discretionary: Key Segments Should See Spending Rebound …………………………………………17
Information Technology: Secular Growth Continues …………………………………………………………………18
International Economic & Market Backdrop
Europe: Ongoing Economic and Political Challenges…………………………………………………………………20
Emerging Asia: Cyclical Rebound Evident ……………………………………………………………………………21
U.S. Dollar: Impact Likely Limited………………………………………………………………………………………21
Interest Rates & Inflation
Corporate Bonds: Favorable Outlook as Economy Gains Traction …………………………………………………24
Inflation: Likely to be Benign ………………………………………………………………………………………… 25
Disclosures ………………………………………………………………………………………………………… 26
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 1WestEnd Outlook Highlights
• We expect the global economic recovery to continue in 2021, amid continued U.S. consumer strength and
business investment as COVID-19 vaccinations help release pent-up demand in certain parts of the economy.
• We anticipate positive equity market returns this year as rising earnings expectations for cyclical stocks should
offset a likely decline in valuation multiples, which is typical early in a cycle.
• Sector allocation will be increasingly important in 2021, in our view, as the ongoing recovery and expansion drive a
rebound in earnings for cyclical sectors and areas of the economy hardest hit by the pandemic, such as retail,
travel, and leisure.
• In global portfolios, we are overweight to Emerging Asian markets, where COVID-19 is relatively well contained
and sector exposures are favorable in our view. We continue to underweight developed international equities,
given the relative economic strength of the opportunities we see in certain U.S. sectors, and ongoing headwinds in
Europe and Japan.
• We have continued to shift away from the relatively defensive portfolio positioning we had the start of the COVID-
19 crisis, while seeking to manage ongoing medical, political, and economic risks. Since late Q1 2020, we have:
– Increased exposures to more economically-sensitive areas of the markets across portfolios, including
establishing allocations to the U.S. Financials, Industrials, and Energy equity sectors.
– Established a new U.S. small/mid-cap equity allocation, trimmed the U.S. large-cap equity overweight, and
moved to an overweight of Asian emerging market equities in global portfolios.
– Increased an overweight to corporate bonds in balanced portfolios and reduced duration to manage risk.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 2U.S. Equity Sector Allocations
WESTEND ETF STRATEGIES
Large-Cap U.S. Equity Sector Positioning and Q2-Q4 2020 Adjustments as of December 31, 2020*
Sector Exposures Sector Exposures Sector Exposures
Increased Maintained/Decreased Eliminated/Avoided
• Energy • Communication Services • Consumer Staples
• Consumer • Health Care • Materials
Discretionary • Information Technology • Real Estate
• Financials • Utilities
• Industrials
* For illustrative purposes only. Sector changes based on U.S. Sector Strategy model portfolio comparing allocations on March 31, 2020 and
December 31, 2020. Source: WestEnd Advisors.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 3U.S. Economic & Market Backdrop westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 4
Sharp Rebound Matches the Severe COVID-Induced Recession
WESTEND COMPOSITE INDICATORS
Portfolio Impact: Our outlook for
1
additional progress for the U.S.
Standard Deviations vs Trend
0.5 economic recovery in 2021
0 warrants significant allocations to
economically sensitive sectors like
-0.5
Industrials, Financials, Energy,
-1 Consumer Discretionary and
-1.5 Information Technology.
-2
Eurozone U.S.
-2.5
Source: Bloomberg WestEnd Advisors
WestEnd’s composite of key U.S. economic readings indicates the U.S. economy has recovered significantly from the depths of
the stay-at-home induced recession. Even with this recovery, certain segments of the U.S. economy and many individuals
continue to face financial challenges. At the same time, other areas of the global economy, like Europe, have not seen the
same degree of economic rebound as the U.S. has experienced.
Although medical and economic risks remain, we believe the economic recovery will continue to progress, and thus an
overweight of economically sensitive sectors is appropriate.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 5U.S. Economic Recovery is Substantially Sharper than 2009
Portfolio Impact: The sharp rebound in wages and
salaries, in our view, should drive a strong consumer
spending recovery, which should, in turn, benefit the
Consumer Discretionary sector. Corporate profits’
return to an all-time high should support growth in business
CapEx and the Industrials sector.
A variety of broad-based economic data series indicate
that the current economic recovery is substantially
outpacing the recovery after the Financial Crisis of
2008.
Wages & Salaries, for example, returned to year-over-year
growth in just four months as higher-earning workers
were less impacted by layoffs in 2020 as compared to the
Financial Crisis.
Similarly, the Commerce Department’s broad measure of
public and private company corporate profits had already
surpassed pre-pandemic levels as of Q3. This three
quarter turnaround compares to a three year recovery
period following the Financial Crisis of 2008.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 6Wage Gains and Fiscal Stimulus Produced Record Savings
MONTHLY HOUSEHOLD SAVINGS
Portfolio Impact: The return to
$600
growth in wages and salaries
$500 In 2020, household savings together with supplementary income
have exceeded the pre-
provided by fiscal stimulus generated
USD $Billions
$400 pandemic trend by a
combined $1.4T abnormally high monthly savings in
$300
the second half of 2020, creating
$200 substantial fuel for consumer
spending going forward. We believe
$100
these developments should bode
$0 well for the overall economy and
Jan-19
Jan-20
Jan-18
Mar-20
Mar-19
Mar-18
Mar-17
Nov-20
Nov-19
Nov-18
Nov-17
Jul-20
Jul-19
Jul-18
Jul-17
May-20
Sep-20
May-19
Sep-19
May-18
Sep-18
May-17
Sep-17
-$100
for cyclical sectors.
Pre-pandemic trend Excess savings vs trend
Source: BEA, Bloomberg, WestEnd Advisors
Fiscal stimulus provided much-needed support for the economy in the early stages of the pandemic, and household balance
sheets remain healthy. Total personal income has remained above its prior trend for the duration of the pandemic,
despite a higher level of unemployment. Additionally, household savings surged to unprecedented levels in 2020, due to a
combination of fiscal stimulus and reduced spending opportunities. Through November, household savings added $1.4T
in savings compared to pre-pandemic trends, equivalent to ~10% of annual consumer spending as measured by PCE.
Additional fiscal stimulus measures are set to hit in early 2021 (including stimulus checks and extended unemployment benefits),
which, combined with the already-elevated level of household savings, should provide more fuel for consumer spending in 2021.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 7Spending on Goods is Helping Drive a Robust Consumer Recovery
PERSONAL CONSUMPTION EXPENDITURES VS. WEA FORECASTS
$17,000 Portfolio Impact: Consumer spending
has rebounded faster than many
$16,000 Bear Case
Bull Case
expected. We believe healthy income
$15,000 Base Case growth, further fiscal stimulus, and
Actual higher asset prices should keep
USD, $Billions
$14,000
consumer spending on a strong
$13,000 trajectory in 2021.
$12,000
Original Forecast Date
$11,000
$10,000
Source: BEA, WestEnd Advisors
Personal Consumption Expenditures have made a strong rebound since last spring. In fact, spending on goods was up
6.9% year-over-year as of November, while spending on services was still down 4.9% compared to November 2019.
Strength in goods spending in areas like furniture, electronics and autos has set the recovery on a path consistent with the
Bull Case we laid out in May 2020. We made portfolio changes as consumer and other data confirmed this more favorable
trajectory as the recovery progressed. Then the positive vaccine news in Q4 gave us increased confidence that the strong
recovery trends will carry over into 2021.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 8Efficacy of COVID-19 Vaccines Sets the Path to Herd Immunity
Vaccine Development: With
several highly effective vaccines
now approved in the U.S., we
believe there is a high likelihood
that a large-scale vaccination
rollout will take hold in the first half
of 2021. We believe this should
lift the economic cloud caused by
the pandemic and support the
economic expansion.
After declining over the summer, daily new COVID-19 cases in the U.S. begun ticking higher in mid-September and
accelerated through most of Q4, as was the case in many countries. While this development poses risks to the economic
recovery, another nationwide shutdown in the U.S. remains unlikely, in our view.
Several highly effective vaccines (>90% efficacy) were approved by the FDA in Q4, and more candidates are in late-stage
development. In our view, vaccines will prove to be a key catalyst for the next phase of economic growth, and
should ultimately lead to a normalization of activity (with some behavioral shifts, on the margin). As the chart above
shows, the high efficacy rates of the MRNA vaccines make herd immunity much more feasible over the next 12 months.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 9Earnings Growth Prospects Vary by Sector as Recovery Takes Hold
EPS GROWTH FORECAST BY SECTOR (1)
90% Portfolio Impact: Cyclical sectors
like Industrials, Consumer
Consensus Year-Over-Year Growth
80%
2021 2022 Discretionary and Financials are
70%
poised, in our view, to deliver strong
60%
earnings growth as the economic
50% recovery progresses into 2021.
40%
30%
20%
10%
0%
(1) Excludes the Energy Sector due to negative EPS in 2020.
Source: Bloomberg, WestEnd Advisors
As is typical at the start of a new economic cycle, we expect earnings growth will vary significantly across market sectors.
Economically sensitive sectors are expected to deliver the strongest growth, as a pickup in demand, together with
cost management during the downturn, should lead to a strong uptick in earnings, in our view, after substantial declines
during the recession.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 10U.S. Equity Valuations in Context of the Cycle and Interest Rates
S&P 500 TRAILING 12-MONTH P/E RATIO
35 Portfolio Impact: We believe investors
30 need to consider the economic
backdrop when examining equity
25
valuations. Stocks look expensive at
20 the start of a new cycle due to
T12M P/E Ratio
depressed earnings from cyclical
15
companies. The chart illustrates that
10 P/Es are typically at their highest level
during a cycle at the start of a new
5
economic expansion, like where we are
0 today.
Jan-54
Jan-57
Jan-60
Jan-63
Jan-66
Jan-69
Jan-72
Jan-75
Jan-78
Jan-81
Jan-84
Jan-87
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Jan-11
Jan-14
Jan-17
Jan-20
Source: Bloomberg, WestEnd Advisors
Key factors when evaluating the current valuation of the overall stock market:
• We believe earnings will ultimately dictate whether stock prices are justified. Consensus ‘21 S&P 500 EPS is 6% above
‘19 EPS (ex-TSLA), which is not significantly out of line with the S&P’s ‘20 return of 18.4%. Plus, there could be an
upside surprise to ‘21 earnings. The recovery is tracking ahead of early estimates due to: 1) the anticipated impact of
highly effective vaccines, 2) pent-up demand for services, and 3) record stimulus in the U.S. and globally.
• Interest-rate adjusted equity valuations are attractive given near-record low interest rates. Adjusted trailing P/Es
have been lower just 20% of the time over the last 60 years.
WestEnd believes investors need to look to sector valuations for opportunities, as P/E variability across S&P 500
sectors together with varied fundamental outlooks creates investment opportunity.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 11Expect Valuations to Contract and Earnings to Rebound in 2021
CONTRIBUTORS TO S&P 500 TOTAL RETURN
45%
40% Portfolio Impact: Although our 2021
35% outlook for mid-to-high single digit
30%
25% 31%
returns for the S&P 500
20% 22%
26%
6% 28% contemplates muted returns relative
15%
10% 6% 8%
9%
to 2020, we believe sector
5%
0% -1%
4% dispersion can offer ample alpha
0%
-5% -10% -12%
-15%
generating opportunities. We also
-10%
-15%
-26% -27% believe we are well positioned to take
-20% advantage of this performance
-25%
-30% dispersion.
-12% Note: Growth figures shown for each bar
-35% pertain to multiple expansion/contraction.
-40%
EPS Growth Dividend Multiple Expansion/Contraction S&P 500 Total Return
Source: Bloomberg, WestEnd Advisors
The trailing price-to-earnings multiple for S&P 500 likely expanded over 30% in 2020. The positive impact on return from
increased valuation, which is typical at economic inflection points, was partly offset by an estimated 15% decline in S&P
500 earnings for 2020. These moves, along with dividend yield, translated into an 18.39% return for the S&P 500 in 2020.
We expect more modest returns in 2021 as robust earnings growth is partially offset by multiple contraction. Again, these
are normal market dynamics at the start of a new cycle – we saw similar multiple and earnings and valuation moves from
2009 to 2011.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 12U.S. Sector Outlook westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 13
Industrials Sector Positioned to Benefit from the Recovery
INTERMODAL CARLOADS TRAFFIC (4-WEEK MOVING AVG)
30% Portfolio Impact: We believe the
25% more economically sensitive parts
20% of the market should perform well
Year-Over-Year Growth
15% as the COVID-19 crisis wanes. An
10%
overweight to the Industrials
5%
sector is desirable, in our view, as
0%
we expect companies in the sector
-5%
will capitalize on economic
-10%
-15%
tailwinds to improve earnings
-20% growth.
-25%
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Source: AAR, WestEnd Advisors
The Industrials sector underperformed the market in 2020, even as economic activity rebounded. As the ongoing recovery
continues to take hold, we believe the Industrials sector’s earnings prospects will improve significantly, in part due to cost
savings measures implemented during the recession. Early signs of improved demand have begun to appear,
including an acceleration in machinery orders growth and rising freight and trucking volumes (see chart above).
Companies in sector sub-industries with the highest direct exposure to lingering impacts from the pandemic, like Airlines,
have relatively small weights within the sector, while we believe the larger companies in the sector will benefit from
rebounding demand much sooner.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 14Fiscal Support and Economic Rebound Should Help Limit
Loan Loss Provisions and Support the Financials Sector
LOW CHARGE OFF RATES SIGNAL BANK CONSERVATISM
4
Loan Loss Reserve to Total Loans for all U.S. Banks Portfolio Impact: Financials are
3.5 well positioned in our view to
Federal Reserve US Charge Off Rates For All Banks Total
3 Loans and Leases benefit from the next phase of the
economic recovery. The strong
2.5
Percent (%)
economic and labor market
2
rebounds should limit banks'
1.5 need for additional loan loss
1 provisions, especially given the
support provided to businesses
0.5
and individuals by the Federal
0 government.
Sep-85
Sep-86
Sep-87
Sep-88
Sep-89
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Source: Federal Reserve, WestEnd Advisors
In our view, U.S. financial institutions are well capitalized following regulatory changes implemented following the 2008
financial crisis. As a result, the pandemic-induced recession fallout has proved manageable for major banks, and systemic
risk has remained low.
The sizeable loan loss provisions that large banks recorded in the first half of last year were conservative, in our
view, as the initial economic rebound was stronger than anticipated and charge-off rates have remained low. This
conservatism, combined with improved capital markets activity and elevated loan growth during the economic recovery,
should contribute to better-than-consensus Financials sector earnings, as banks continue to release those provisions
through the recovery.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 152021 Normalization to Drive Energy Demand Recovery
Portfolio Impact: In our view, the
Energy sector is well
positioned to benefit from the
next phase of the economic
recovery. Reduced production
capacity due to financial distress,
under-investment in recent years,
and a shift in environmental policy
in the U.S. increase the likelihood,
in our view, that the pickup in
demand for energy products
outpaces the supply response.
The positive vaccine developments have increased our visibility into the economic recovery in 2021. With several >90%
effective vaccines to be rolled out broadly in 2021, the likelihood of a rebound in the demand for energy products has risen.
In our view, international travel and trade volumes are likely to make a strong recovery once herd immunity is achieved, but
consensus forecasts for energy demand look understated compared to pre-pandemic levels as well as relative to past
recoveries. Demand has already begun to pick up. From June to November, global demand outstripped supply by a
combined ~17 mmboed, the largest 6-month period on record since at least 2004, as highlighted above.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 16Key Segments of Consumer Spending to Benefit in 2021
Portfolio Impact: We believe the
Consumer Discretionary sector is
positioned to be the largest direct
beneficiary of highly effective
vaccines and a faster-than-
anticipated recovery in services
spending, including travel and
leisure activities.
We see key segments of the Consumer Discretionary sector as positioned to benefit from the next stage of the consumer spending
recovery. Some of these areas have been winners in the COVID environment, while others have suffered severely.
Certain retail, travel, leisure, and restaurant businesses (~30% of XLY's market cap) are likely to benefit from pent-up demand in
2021 and 2022 as consumers are anxious to make up for lost time, particularly with a 95% effective vaccine.
We view Amazon.com (~23% of XLY) as positioned to increase profits going forward as sales at their Online Stores segment
remain elevated, COVID-related costs go away, increased customer engagement benefits Ad and Subscription profits, and its
increased revenue base helps leverage fixed costs.
We believe Home Improvement and Homebuilders (~15% of XLY) should remain a driver of earnings growth for the sector, as
healthy housing trends should persist, driven, in part, by a desire to take advantage of work-from-home flexibility coupled with record-
low mortgage rates.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 17Tech Valuations Elevated, But Secular Growth Continues
BUSINESS CAPEX GROWTH
20% Portfolio Impact: The Information
15% Technology sector does not
10% appear to be in its economic
Year-Over-Year Growth
time given the cyclical rebound in
5%
earnings overall, but secular drivers
0%
of earnings growth for Tech remain
-5% intact. We believe that secular
-10% growth will look more appealing as
-15% the economic cycle advances.
Total Fixed Investment Ex-Bus. Tech
-20%
Business Tech Investment
-25%
Source: BEA, Bloomberg, WestEnd Advisors
The Information Technology sector is expected to deliver half the earnings growth of the S&P 500 in 2021, but trades at a
~20% premium to the market. (Growth at an Extended Price – rather than GARP)
Even as technology companies are likely to see limited demand pickup from the cyclical economic recovery, businesses and
consumers have increasingly embraced digital platforms like cloud computing, eCommerce, digital payments and social
media in recent years. We believe adoption of these products and services means that sales growth in these categories
should remain above overall GDP growth for an extended period, but businesses tied to these secular trends are unlikely to
see sales pickup with the economic recovery.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 18International Economic & Market Backdrop westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 19
Europe Continues to Face Economic and Political Challenges
Portfolio Impact: Due to the
renewed lockdown measures in
Europe and the region’s soft
economic fundamentals heading
into the pandemic, there is less
visibility into the region’s 2021
recovery relative to that of the U.S.
As such, we have maintained our
underweight to Europe, which
remains our largest regional
underweight.
We expect Europe’s Q4 and potentially Q1 2021 growth will be materially lower than in the U.S. due to the renewed
lockdowns, and many economists are forecasting a double-dip recession for the region.
The chart above highlights the volatility and variability in consumer activity in major European countries. In our view, this will
ultimately impact the region’s recovery in 2021 and lead to a more fragmented expansion. While recent stimulus efforts
are a positive for Europe, the structure of the EU likely makes its stimulus less efficient than in the U.S.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 20Cyclical Rebound Evident in Emerging Asia
CHINA EXPORTS (IN USD) YOY GROWTH
60%
50% Portfolio Impact: Economic data has shown that
40% Emerging Asia leads other regions in its economic
Year-Over-Year Growth
30%
recovery, which we believe should drive positive GDP and
20%
10%
earnings growth in 2021 as the region transitions to an
0% early-cycle expansionary phase. Given the impending
-10% cyclical earnings recovery and the region’s secular
-20%
tailwinds, EM Asia valuations appear attractive relative
-30%
-40%
to the U.S., in our view, and we have maintained an
overweight allocation.
Source: Customrs General Administration PRC, Bloomberg, WestEnd Advisors
Emerging Asia has been a leader in the global economic
CHINA INDUSTRIAL ENTERPRISES TOTAL PROFITS YOY recovery. In China, activity has largely recovered to
40
pre-pandemic levels. As shown in the nearby charts,
30
China’s exports were up +21% YoY at the end of
Year-Over-Year Growth (%)
20
November, and industrial profit growth was positive
10
for a seventh consecutive month. China has proven
0
able to limit the fallout from the pandemic on the Chinese
-10
economy, largely via targeted lockdown measures and the
-20
-30
implementation of accommodative fiscal and monetary
-40
measures, which are likely to remain in place in early 2021.
Export growth was also back in positive territory in both
South Korea and Taiwan in November.
Source: National Bureau of Statistics of China, Bloomberg, WestEnd Advisors
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 21U.S. Dollar in Neutral Territory
UNITED STATES REAL EFFECTIVE EXCHANGE RATE
140 Portfolio Impact: Risks to the USD
130 appear balanced, in our view, given
120 stable monetary policy forward
110 guidance and an increased
likelihood that economic
100
growth accelerates in 2021. In
90
the event that the dollar does
80
continue to soften, we expect
70 several areas would benefit,
60 including EM Asia, energy prices,
50 and large-cap multinationals based
within the U.S. (including names in
Tech, Health Care, and Industrials).
Source: Bank for International Settlements, Bloomberg, WestEnd Advisors
The U.S. dollar has been in an appreciating cycle since 2014, driven by interest rate differentials and a more consistent path of
economic growth in the U.S. relative to that of other regions. As the chart above shows, the USD has typically
experienced long, steady cycles, with bouts of moderate volatility along the way.
In our view, the Federal Reserve is likely to remain on hold for the foreseeable future, and the economic recovery is poised to
accelerate alongside the vaccine rollout in 2021. Thus, we are not forecasting a sharp correction in the dollar or the beginning
of a material new trend for the dollar in either direction, absent some significant regime changes in monetary policy (in the U.S.
or abroad).
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 22Interest Rates & Inflation westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 23
Spread Differential on Corporates Attractive as Credit Outlook Improves
NOMINAL YIELDS OF TREASURIES AND IG CORPS
Portfolio Impact: We believe 3.5
US Treasury Actives Curve
corporate spreads are likely to 3
persist concurrent with low price US Corporate BBB Yield Curve
volatility, leading to corporate 2.5
bond outperformance over the 2
next six to twelve months in a
benign credit environment. 1.5
1
0.5
0
1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y
Source: Bloomberg, WestEnd Advisors
Intermediate investment grade corporate bonds currently offer 60-110 bps more yield than similar-term nominal
Treasury bonds.
As the economy continues to improve, we expect the nominal Treasury yield curve will eventually steepen,
consistent with prior recoveries and expansions. Additionally, we believe improving corporate fundamentals in a
rebounding economy help reduce the risk of widening corporate yield spreads versus Treasury bonds.
In a benign credit environment, we anticipate the excess yield of Investment Grade corporate bonds will bolster total
return for fixed income investors.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 24Key Inflation Categories Point to Modest Overall Gains
LARGE DRIVERS OF CORE CPI
7% Portfolio Impact: TIPS prices
Shelter MC Serv. Core
6%
continue to account for a pickup in
Year-Over-Year Growth
inflation which we see as unlikely in
5%
the intermediate term making these
4% bonds less attractive in our 12 to 18
3% month investment window.
2%
1%
0%
Source: BLS, Bloomberg, WestEnd Advisors
Inflation breakevens, which are investor inflation expectations derived from the pricing differences between nominal and
inflation-protected Treasury bonds, rose materially in 2020 as fiscal stimulus was implemented and the economic recovery
took hold.
However, key inflation categories, including shelter and services, indicate decelerating gains in core inflation
moving forward. These large components of core CPI (making up ≈50%) illustrate disinflationary trends. Inflation risk
remains low in our view due to existing slack in the economy, including key areas like the labor market and capacity utilization.
westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 25Footnotes & Disclosures WestEnd Advisors is an SEC-registered investment advisor. Registration of an investment adviser does not imply any level of skill or training. The firm is an independent investment management firm, 100% owned by its active principals. WestEnd manages equity securities for individuals and institutional clients. This report should not be relied upon as investment advice or recommendations, and is not intended to predict the performance of any investment. Past performance is not indicative of future results. It should not be assumed that recommendations made in the future will be profitable. The information contained herein is not intended to be an offer to provide investment advisory services. Such an offer may only be made if accompanied by WestEnd Advisors’ SEC Form ADV Part 2. These opinions may change at anytime without prior notice. All investments carry a certain degree of risk including the possible loss of principal, and an investment should be made with an understanding of the risks involved with owning a particular security or asset class. The information has been gathered from sources believed to be reliable, however data is not guaranteed. The Standard and Poor’s 500 Stock Index includes 500 stocks and is a common measure of the performance of the overall U.S. stock market. The MSCI ACWI consists of 49 country indexes comprising 23 developed and 26 emerging market country indexes. The total return of the MSCI ACWI (Net) Index is calculated using net dividends. Net total return reflects the reinvestment of dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The Bloomberg Barclays US Aggregate Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. The Bloomberg Barclays US Aggregate Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. An index is unmanaged and is not available for direct investment. Any portfolio characteristics, including position sizes and sector allocations, among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature, and risk from those shown. The investment processes, research processes, or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate, or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified. Holdings, Sector Weightings, and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ strategies’ holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary. Upon request, WestEnd Advisors will provide a list of all recommendations for the prior year. westendadvisors.com | info@westendadvisors.com | 888.500.9025 Macroeconomic Highlights Q1 2021 26
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