The Next Phase 2021 OUTLOOK - INVESTMENT ADVISORY GROUP - BB&T Perspectives Magazine
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INVESTMENT ADVISORY GROUP
2021 OUTLOOK
The Next
Phase
Securities and Insurance Products and Services:
• Are Not FDIC or any other Government Agency Insured
• Are Not Bank Guaranteed
• May Lose Value2021 Outlook | The Next Phase
Contents Executive Summary Key Takeaways
2 The Next Phase: We remain positive heading into 2021, with Economy: A Tale of Two Halves
Commentary + Positioning our work suggesting we are in a multi-year
bull market, supported by an economy in Elevated savings and cash balances provide a cushion awaiting
the early stages of expansion. From vaccine deployment and leaves economy spring loaded
7 Sector Strategy depressed levels, the global economy, led Second half of the year much stronger than the first half
by the US and China, is set to show the best We estimate 4.4% US economic growth, the highest since 1999
8 Economy growth in a decade, though the path
forward will be uneven and highly Equity: Next Phase Begins
dependent on the rollout of COVID-19
2 Equities Strongest stage behind us, but market still has upside
vaccines.
0
Next phase characterized by positive but moderating returns
4 Fixed Income The first phase of the current bull market,
Drivers shifting from P/E expansion to earnings recovery that is
3 the strongest from a return standpoint,
underappreciated, and we expect a snapback towards trend
appears to be over. In the next phase, we
5 Non-Traditional expect positive but moderating returns,
8 Fixed Income: Higher but Constrained Yields
sustained by improved earnings. Several of
6 Publication Details our studies suggest the potential for 10%- Base case outlook: 10-year US Treasury yield range of 0.50-1.50%;
3 Disclosures plus equity gains in the year ahead. most of the upside occurring in the second half
Elevated investor expectations and vaccine
Increased Treasury supply, recovery, and vaccines should
deployment execution are among the
encourage slightly higher yields and a steeper yield curve
primary risks to our outlook, and we expect
markets to move in a two steps forward, International demand for US fixed income and Federal Reserve
one step back fashion. Within fixed income, purchases to cap major upside yield moves
we foresee a modest lift in US yields, a
slightly steeper yield curve and continued Key Positioning
demand for credit as sectors with rates Overweight equity relative to Favor Industrials and Materials
exceeding inflation dwindle. fixed income and cash paired with Technology and
Barbell US small cap Consumer Discretionary
overweight with large growth Overweight high yield and
Underweight international investment grade bonds
developed markets, until US Dollar to stabilize against
confirmation of trend change developed market currencies
Past performance is not indicative of future results.
Please see important disclosures for additional informationThe Next Phase
A Look Back Economy – A Tale of Two Halves
The past year is a good reminder of Yogi Berra’s famous quote, “It’s tough The global economies’ divergent paths to pre-pandemic levels of activity
to make predictions, especially about the future.” It is also one of those will be inherently volatile as forecasts rely on public health conditions. The
years where having the headlines ahead of time may not have been successful deployment of vaccines and therapies is expected to improve
beneficial from an investment standpoint. Indeed, if investors had known business and consumer sentiment significantly. However, social
at the end of 2019 that the year ahead would see a global pandemic, the distancing measures are set to continue during the first half of 2021,
sharpest decline in economic growth since World War II, an elongated leaving the strongest part of the recovery to the second half of the year.
election process, and mass global protests, many would have been Aided by massive fiscal stimulus and very supportive monetary policy,
positioned defensively with the expectation of significant losses for the global savings rates and related cash balances in personal and business
year. Instead, the worst quarter in economic history was followed by the checking accounts swelled during 2020. This should provide a cushion as
strongest quarter, and the sharpest bear market in history was followed by the world awaits broad vaccine distribution. After an estimated decline of
the sharpest rebound into a bull market. 4.4% in 2020, the global economy should grow at a clip closer to 5%, the
fastest pace since 2010.
The past year reinforces the importance of a disciplined investment
process in the face of uncertainty. Our weight-of-the-evidence approach The US and China, the world’s two largest economies, remain key drivers
helped us navigate our clients through a treacherous period and take of global growth over the next year. China’s economy has already
advantage of market dislocations. This period also highlights the rebounded to pre-pandemic levels, and we expect the US to follow suit in
importance of being flexible and adapting as the data shifts. 2021. We estimate 4.4% US economic growth, which is roughly twice the
pre-pandemic trend and would be the highest rate since 1999. Our work
Although the pandemic continues and it will forever change our lives, there suggests we are in the nascent innings of an economic expansion, albeit
is now light at the end of the tunnel. Indeed, a singular global focus on uneven both by industry and geographically. Growth appears to be spring
finding a solution has led to a miraculous feat—what often took five to 10 loaded to accelerate dramatically for several quarters later in the year and
years has taken less than a year: a COVID-19 vaccine has been developed into 2022 given pent-up demand to “do things.” Most consumers are in a
and is being deployed. This should instill optimism. That said, the economy much better position financially than in a typical post-recessionary exit
and markets will continue to swap between near-term COVID-19 (e.g., good credit quality, steady incomes for most and wages improving
challenges and the promise of vaccine distribution that suggests a way for low-end workers). Europe still appears to be a weaker link, entering the
forward. Still, there are more reasons for our constructive view over the new year with lost momentum given mandatory social distancing due to
next year(s) than reasons for negativity based on obstacles that remain rising COVID-19 cases on top of shakier fundamentals.
over the next few months.The Next Phase (continued)
Equities – Next Phase Begins
The economic backdrop should be supportive for equities, and we are now Following the first nine months of the previous bull markets since 1950,
set to shift to the next phase of the bull market. Markets have snapped the subsequent average 12-month total return for the S&P 500 has
back from deep pessimism and overly depressed levels, placing the been 16%.
current rebound alongside the strongest bull markets of the past 70 years.
Our work shows it is typical for stocks to see a notable moderation of Strong price momentum has tended to be a positive on a forward 12-
gains after the initial thrust off the bottom, and we expect the driver of month basis. For example, in November, the S&P 500 posted a monthly
equity gains to shift from valuation expansion to an earnings recovery. return in excess of 10% for the second time in 2020 and only the 13th
Upside potential remains as the average bull market has gained a time since 1950. Historically, stocks have averaged 13% price gains
cumulative 179% and lasted almost six years versus the current rise of over the next 12 months following past instances.
about 65% over nine months.
Still, after such a large rise, stock market valuations are less attractive. But
Forecasting where a market will stand on an arbitrary day, such as what appears to be underappreciated is that market valuations have been
December 31, or any other random day, is treacherous at best, especially range bound since June. The driver of returns since then has been the
considering valuations historically have had little correlation with near-term sharp rise in earnings. Moreover, surviving companies are set to emerge
returns. Therefore, we place a much greater emphasis on, and have greater from this crisis as more efficient and more profitable than ever, aided by
confidence in, market direction and relative opportunities. That said, the acceleration of technology and productivity trends and declining
several of our studies suggest the potential for double-digit stock gains in interest expense. Similarly, following the global financial crisis, corporate
2021: profits rebounded stronger than most investors expected—despite one of
the weakest economic recoveries in history as cost cutting allowed a
greater percentage of revenues to flow to the bottom line earnings
The S&P 500 has risen 85% of the time while the US economy is in number. Accordingly, we view it as very likely that S&P 500 earnings will
expansion—and the majority of those occurrences (65%) have seen the quickly snap back closer to the longer-term trend—$190 to $200 by 2022—
S&P 500 rise more than 10% on a total return basis. up from the 2021 consensus earnings estimate of $169 (which also has
Our solid US economic outlook combined with benign inflation has upside potential).
typically been a positive environment for stocks. Since 1950, there have
been 10 years where the US economy grew between 3% and 5% and Vaccine deployment execution is a risk to our positive view, as are elevated
inflation stayed between 1% and 3%, similar to our base line expectation investor expectations. Several of our investor sentiment metrics show
for 2021. In all cases, stocks rose with double-digit average gains. signs of froth, which leaves the market vulnerable to unexpected bad news
early into 2021. Thus, markets should continue to move in a two steps
The equity risk premium (ERP), which compares the earnings yield of forward, one step back fashion.
stocks to Treasury yields, suggests stocks remain attractive on a
relative basis. The current ERP is in a zone that has corresponded with
an average 10% outperformance of stocks relative to 10-year
Treasuries on a forward 12-month total return basis. Furthermore, there
is scope for the ERP and uncertainty to decline, supporting stocks,
given clarity on the US election and vaccine development.The Next Phase (continued)
Fixed Income – Higher but Constrained Yields Overall Positioning
Similar to our expectation of a tale of two halves for the economy, we Given the aforementioned backdrop, entering 2021, we maintain an equity
anticipate a bifurcated fixed income narrative in 2021, largely shaped by overweight relative to fixed income. Within equities, we begin the year with
the timeline of COVID-19 vaccines. During the early part of the new year, a US bias, where economic and earnings trends remain stronger than most
virus-related setbacks and global economic activity below potential is likely parts of the globe. Also, unlike the consensus view, we expect the dollar to
to weigh on yields. Central banks are also set to remain accommodative, stabilize relative to international developed markets (IDM). US political
and more than $17 trillion worth of debt worldwide is offering sub-zero uncertainty should fade while uncertainty in Europe may rise given an
yields. International demand for US fixed income restrained upside yield important upcoming election in Germany. We expect central banks such
moves in 2020 – a phenomenon that will likely continue in the year ahead as the Federal Reserve and the European Central Bank to shift to more of a
as US yields remain significantly higher than most developed markets steady state equilibrium. Moreover, the euro, the largest component of the
sovereigns. US Dollar Index, has already risen double-digits since March and much
higher levels would impede the region’s economic recovery.
Some of the forces anchoring US yields in early 2021 should ease later in
the year, allowing for intermediate and long US yields to rise modestly IDM equities appear relatively cheap, but conditions remain challenging.
alongside improving growth and inflation outlooks. A hefty load of US These economies were already in a more fragile state prior to the
Treasuries is likely to be issued, further encouraging slightly higher yields pandemic. That said, the sector composition of IDM tends to be more
and a steeper yield curve. cyclically exposed relative to the US, and these markets would likely
outperform should the global economic recovery prove stronger than
current expectations. We are closely monitoring for improvement in
On the short end, we anticipate the Federal Reserve (Fed) will leave policy relative earnings, which continue to lag, as well as price trends before
rates untouched at 0-0.25% throughout the year and continue its upgrading our positon. We are neutral emerging markets, though they
aggressive quantitative easing program. Although the Fed will provide one appear to be in better shape relative to IDM. China, which accounts for
of the key supports for US fixed income in 2021, the central bank is also a more than 40% of the index, has weathered the pandemic better than most
source of uncertainty. The Fed will need to strike a balance between parts of the globe, and emerging Asia continues to impress.
maintaining an accommodative monetary environment without allowing
economic growth to push up inflation and interest rates too quickly, which
would counteract some of its monetary stance. Given the competing (continued on next page)
forces, our base case outlook calls for a 10-year US Treasury yield range of
0.50-1.50%, with most of the upside occurring in the second half of the
year.The Next Phase (continued)
Overall Positioning (continued) Tactical Outlook (3-12 Months)
Within the US, we see a compelling relative opportunity in small caps, and we are
Less More
pairing that alongside a modest large cap growth tilt. We view this as an effective Asset Classes Attractive Attractive
barbell between cyclical and growth exposure. We anticipate the small cap
position should outperform during periods where investors gain confidence in the Equity
economic recovery, and view it as a more effective approach to participate in a Fixed Income
potential reflation trade relative to large cap value and the international markets.
Our large cap growth bias should do well during periods where markets get
Gold
concerned about uneven economic growth and logistics surrounding the safety Cash
and distribution of COVID-19 vaccines. Less More
Global Equity Attractive Attractive
Likewise, our sector overweights are balanced between economically-sensitive US Large Cap
and growth sectors. On the cyclical side, our work suggests Industrials and
US Mid Cap
Materials are in the best position to benefit from a global recovery with earnings
and price trends already improving. Conversely, Technology, which was the first US Small Cap
sector to see forward earnings move above pre-pandemic levels, and Consumer
International Developed Markets
Discretionary, which should continue to benefit from labor market gains, remain
standouts on the growth side. We caveat that this is where our positioning stands Int'l Developed Markets Small Caps
entering 2021, but fully expect adjustments along the way given the tactical nature
Emerging Markets (EM)
of our sector strategy.
Growth Style Relative to Value
Low global yields in the context of an economic recovery suggest that investors Less More
US Fixed Income Attractive Attractive
will continue to seek out higher yielding, riskier fixed income. Although the
opportunity set has diminished, we still see relative value in credit. We expect high US Government
yield and investment grade corporate bonds to outperform, mostly through the
US Mortgage-Backed Securities
yield pickup. Given a wider range of potential outcomes, high quality fixed income
should remain an important portfolio ballast. US Investment Grade Corporate (IG)
US High Yield Corporates (HY)
We are maintaining a positive view on gold, which we upgraded in the fall as a
Floating-Rate Bank Loans
partial hedge against US election and COVID-19 uncertainties. We are closely
monitoring the position, though, as clarity on both fronts has taken away some of Duration
its luster. Several factors still support gold, including low interest rates, ballooning
central bank balance sheets, elevated budget deficits and its portfolio
diversification attributes.
For domestic use only. Past performance does not guarantee future results.Sector Strategy
In 2021, the economy should continue to recover with the likely wide-spread implementation of COVID-19 vaccines, though elevated cases may
weigh on near-term activity. Consequently, our sector overweights include a mix of cyclical (Industrials and Materials) and growth sectors
(Consumer Discretionary and Technology). Last Updated = 1/4/2021
TACTICAL OUTLOOK
S&P 500
(3-12M)
SECTOR SECTOR
Under- Over-
T F V COMMENTS
WEIGHT
weight weight
Industrials continue to improve from a relative price performance basis and a fundamental
Industrials 8.7% + + - perspective as many companies within the sector experience a pickup in business.
The relative strength of Materials is expected to continue as underlying macroeconomic trends signal
Materials 2.7% + + that the trough is behind us and that we are recovering. US dollar weakness is a positive.
Consumer Profit taking and a shift to the cyclical sectors has caused a pause in the sector, but we remain
Discretionary
11.1% + - positive given the expected benefits of a full reopening of the economy.
Information Improving investor sentiment and rotation into cyclicals has created near-term pressure although not
Technology
27.7% - enough, at least not yet, for a change in our opinion given the uneven economic outlook.
Communication
Services
11.1% ● +
Communication Services has shown some recent improvement in technical price trends, although
fundamentals and valuations are mixed in our work.
Financials 10.5% ● +
While challenges remain (low interest rates, tight spreads, credit issues), the outlook is improving, as
evidenced by rising price and earnings trends for Financials compared to the broader market.
Health Care 13.7% ● +
Valuations are attractive and fundamentals are reasonable. However, Health Care has not performed
well recently and is challenged with concerns regarding potential regulatory changes.
Energy 2.5% ● - +
Recent strong relative performance has been supported by attractive valuations and an improving
macro outlook. Long-term, however, supply/demand factors remain material challenges.
As the macro outlook improves and as critical unknowns fade (US elections, COVID-19 vaccine
Consumer Staples 6.7% - timing), defensive sectors, such as Staples, will likely lag; relative price trends are deteriorating.
Poor relative performance for this “bond proxy” sector is being driven by an increasing expectation for
Utilities 2.8% - - higher interest rates and weak fundamentals.
Uncertainty regarding the collectability of rents, in addition to other specific concerns at the sub-sector
Real Estate 2.5% - - level, have been weighing on the group, which is comprised almost entirely of REITs.
For domestic use only. All information supplied or obtained from this page is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of
an offer to buy or sell a security, or a recommendation or endorsement by STAS of any security or investment strategy. The information and material presented in this commentary are for general
information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this commentary, and are subject to
change without notice. Truist makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use.
T = Technical. This factor has the greatest focus in our overall methodology with an emphasis on relative price trends
F = Fundamentals. Includes earnings and sales trends, with an emphasis on recent changes to estimates
V = Valuation. Inputs include current/historical and absolute/relative to the overall market
+ Top Tier, -Bottom Tier, Middle Tier; Data Source: SunTrust IAG, FactSet.
Investment and Insurance Products:
•Are not FDIC or any other Government Agency Insured •Are not Bank Guaranteed •May Lose ValuePerformance Summary as of December 31, 2020
Index % Total Return MTD QTD YTD 1 Yr Rates (%) 12/31/20 9/30/20 6/30/20 3/31/20 12/31/19
MSCI ACWI (net) 4.64 14.68 16.12 16.12 Fed Funds Target 0.25 0.25 0.25 0.25 1.75
Libor, 3-Month 0.23 0.23 0.30 1.45 1.90
S&P 500 3.84 12.15 18.25 18.25
T-Bill, 3-Month 0.07 0.10 0.15 0.10 1.54
MSCI EAFE (net) 4.65 16.05 7.75 7.75 2-Year Treasury 0.11 0.13 0.14 0.19 1.57
MSCI Emerging Markets (net) 7.35 19.70 18.15 18.15 5-Year Treasury 0.36 0.27 0.28 0.37 1.69
Dow Jones Industrials 3.41 10.73 9.65 9.65 10-Year Treasury 0.91 0.68 0.65 0.68 1.91
30-Year Treasury 1.64 1.45 1.40 1.31 2.38
NASDAQ Composite 5.65 15.41 43.24 43.24
Bloomberg Barclays Aggregate (YTW) 1.12 1.18 1.25 1.59 2.31
FTSE NAREIT All Equity REITs Index 2.45 8.15 -5.08 -5.08 Bloomberg Barclays Municipal Bond
0.77 0.96 1.16 1.75 1.53
Bloomberg Commodity Index 4.97 10.19 -3.10 -3.10 Blend 1-15 Year
ICE BofA US High Yield 4.24 5.76 6.84 9.24 5.41
Bloomberg Barclays Aggregate 0.14 0.67 7.45 7.45
Currencies 12/31/20 9/30/20 6/30/20 3/31/20 12/31/19
ICE BofA US High Yield 1.91 6.48 6.12 6.12
Euro ($/€) 1.22 1.17 1.12 1.10 1.12
Bloomberg Barclays Municipal Bond
0.48 1.33 4.70 4.70 Yen (¥/$) 103.25 105.53 107.89 107.96 108.68
Blend 1-15 Year
ICE BofA Global Government xUS Pound ($/£) 1.37 1.29 1.24 1.24 1.32
2.07 4.30 9.72 9.72
(USD Unhedged) Commodities 12/31/20 9/30/20 6/30/20 3/31/20 12/31/19
ICE BofA Global Government xUS Crude Oil (WTI) 48.52 40.22 39.27 20.48 61.06
0.33 0.74 3.81 3.81
(USD Hedged) Gold 1,895 1,896 1,801 1,597 1,523
JP Morgan GBI-EM Global Diversified
3.48 9.62 2.67 2.67 Volatility 12/31/20 9/30/20 6/30/20 3/31/20 12/31/19
Composite
CBOE VIX 22.75 26.37 30.43 53.54 13.78
U.S. Style % Total Returns (Russell Indexes) S&P 500 Sector % Total Returns
MTD YTD MTD YTD
Value Core Growth Value Core Growth 43.5
33.0
23.4 20.6
3.83 4.23 4.60 Large 2.77 20.79 38.15 10.7 13.3 11.0
3.1 2.5 1.8 4.4 6.3 3.9 5.7 2.5 1.5 0.7 0.5
1.2
-1.7 -2.2
4.63 4.68 4.80 Mid 4.93 16.96 35.27
-33.5
7.92 8.65 9.35 Small 4.60 19.79 34.33 Comm Cons Cons Energy Financials Health Industrials Info Tech Materials Real Estate Utilities
Services Disc Staples Care
Data Source: SunTrust IAG, FactSet. MTD = Month to Date, YTD = Year to Date
Important Disclosures: All information is as of title date unless otherwise noted. This document was prepared for clients of SunTrust Bank for informational purposes only. This material may not be suitable for all investors and
may not be redistributed in whole or part. Neither Truist Financial Corporation, nor any affiliates make any representation or warranties as to the accuracy or merit of this analysis for individual use. Information contained herein
has been obtained from sources believed to be reliable, but are not guaranteed. Comments and general market related projections are based on information available at the time of writing and believed to be accurate; are for
informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm and may not be relied upon for future investing. The views expressed may change at any time. The
information provided in this report should not be considered a recommendation to purchase or sell any financial instrument, product or service sponsored or provided by Truist Financial Corporation or its affiliates or agents.
Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.
Past returns are not indicative of future results. An investment cannot be made into an index.
Securities and Insurance Products and Services:
Are Not FDIC or any other Government Agency Insured | Are Not Bank Guaranteed | May Lose ValueEconomy
Global Growth Set to Rise at Best Pace Since 2010
Global GDP Growth
IMF Forecast
The global economy is set to snap
back in 2021, but the path back to pre- 5.4%
5.2%
pandemic levels of economic activity
will be partially contingent on the 4.3%
timing of vaccine deployment. 3.5% 3.5% 3.6%
3.3% 3.3% 3.2% 3.1% 3.0%
-4.4%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020f 2021f
Data Source: SunTrust IAG, International Monetary Fund, BloombergDivergent GDP Recovery Timeline to Pre-Crisis Peak, with
US and China Leading the Way
The US and China are the world’s two largest economies, accounting for about 40% of global GDP. China’s real GDP is
already back above its pre-crisis level, and the US recovery should follow suit later in 2021. Europe’s economy, which
entered the pandemic in a more fragile position and saw a sharper decline, will take longer to fully recover.
United Italy
China Germany Brazil UK Spain Japan
States
2020 2021 2022 2023 2024 2025 2026
Turkey Canada
France S Africa Mexico
S Korea Russia
Data Source: SunTrust IAG, International Monetary Fund, IHS Markit, BloombergMajor Global Economic Regions
United States Emerging Asia
Following the brief pandemic-induced China and Taiwan are the only major
recession, the US economy experienced a economies with positive economic growth
V-shaped initial recovery phase in the rates in 2020. China is expected to grow over
second half of 2020. Going forward, 8.5% in 2021, pulling the region out of
growth will predictably moderate. recession. Liberalization and reforms in its
currency account accelerated acceptance of
We expect a tale of two halves, but China’s renminbi as a reserve currency in
once vaccines are fully deployed, we 2020. This trend is set to continue in 2021.
expect US GDP growth to thrive in 2021
with the fastest annual growth rate in The Regional Comprehensive Economic
more than 20 years, nearly double the pre- Partnership (RCEP), signed in November, has
pandemic pace of 2.3%. created a free-trade zone larger than the EU
and US-Mexico-Canada agreements. Overall
The pandemic has forced businesses to the deal eliminated 90% of tariffs for
adapt and innovate, which has driven participating countries. It is expected to shape
transformation that we expect will the region for many years to come. The zone
continue for years to come. Innovation and encompasses nearly a third of the world’s
structural advantages favor the US population and global GDP.
economically among developed nations.
United States Europe Emerging Asia Europe
Overall economic activity normalized faster Broader Europe is expected to have economic
2019 GDP GDP Growth Estimates than expected during the summer months, growth of 4.6% in 2021, with Germany lagging
($86.6 Trillion Total) 2020 2021
and demand for exports, pre-dominantly from the average at 4.2% due to experiencing a
Asia, improved industrial production. much shallower recession in 2020. Italy, Spain,
France and the UK are expected to see growth
4.4% The deep economic drop highlighted Europe’s higher than 5.0% following double-digit
Other $21.4 structural weaknesses, such as aging economic losses.
populations, strained government budgets in
-3.6% southern parts of the continent and the heavy
4.6% influence of the services sectors, like tourism
$22.9 $20.8
and hospitality.
-7.2%
6.8%
-0.3%
Data Source: IMF, Bloomberg, IHSMarkit
Europe includes developed countries and economies considered to be ‘emerging’, such as RussiaCentral Banks to Remain Supportive Through 2021
Central Bank Balance Sheets: Year-over-Year Expansion as a % of GDP
35%
Bank of Japan European Central Bank Bank of England Federal Reserve
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20
Data Source: SunTrust IAG, BloombergGlobal Fiscal Stimulus Measures Expanded Sharply &
More Expected Until Vaccine Is Widely Available
The global fiscal response to the Fiscal Stimulus by the G20 as a % of GDP
pandemic over the past year has been
2020 2009
much stronger and faster than what
occurred during the Great Financial World
Crisis. This has helped to stave off a United States
deeper economic downfall and aided Japan
the current rebound. Fiscal stimulus is South Africa
set to remain supportive into 2021. South Korea
Canada
Brazil
Germany
Australia
United Kingdom
India
France
Argentina
Turkey
Italy
Indonesia
China
Saudi Arabia
Russia
Mexico
0% 2% 4% 6% 8% 10% 12% 14% 16%
Data Source: Invesco, SunTrust IAGGlobal Services Have Lagged Manufacturing but Should
Improve After Vaccine Distribution
Aided by fiscal and monetary support, % of Countries with PMIs in Expansion
more than 70% of the world’s
Manufacturing Services
economies are in a manufacturing
recovery. 100%
Services, however, are lagging. Unlike 90%
goods, which can be purchased and
80%
shipped, most services cannot be
performed easily under social 70%
distancing restrictions.
60%
50%
40%
30%
20%
10%
0%
Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20
Data Source: SunTrust IAG, Bloomberg. Selected Countries: Australia, Austria, Brazil, Canada, China, Colombia,
Czech Republic, France, Germany, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, Philippines,
Poland, Russia, South Africa, South Korea, Spain, Taiwan, Thailand, Turkey, United Kingdom, United States, and
Greece. Services PMI through November 2020.‘Swoosh’-Shaped Recovery Ahead
The path forward is transitioning from the V-shaped initial phase of the recovery to a much more moderate but still healthy
pace. This should resemble Nike’s iconic ‘swoosh’ logo and will likely take until the second half of 2021 to regain the lost
ground.
US Gross Domestic Product ($Trillions)
Actual SunTrust IAG Forecast Prior Peak
$21 Recession Expansion
$20
$19
$18
Second Half 2021
for “Full” GDP
$17 Recovery
Recession
“Trough”
$16
3Q 2019 4Q 2019 1Q 2020 2Q 2020 3Q 2020 4Q 2020 1Q 2021 2Q 2021 3Q 2021 4Q 2021 1Q 2022 2Q 2022 3Q 2022 4Q 2022
Data Source: SunTrust IAG, IHS Markit. Real gross domestic product, actual for 3Q 2019 through 3Q 2020,
SunTrust IAG forecast for 4Q 2020 through 4Q 2022.We Expect the Strongest Annual US Economic Growth
Since 1999, Driven by Consumers
We expect US GDP growth of about Components of Gross Domestic Product (GDP)
4.4% year-over-year for 2021. This
would be almost twice as fast as the
10-year average of 2.3% and the 4.4%
fastest annual growth rate in more
3.1%
than 20 years. 2.5% 2.2% Government
3.0%
1.7% 2.3%
Our 2021 US GDP growth outlook is
Residential Building
largely driven by a rebound in
consumer spending, which represents
almost 70% of the economy, along Business Spending
with positive contributions from all the
major components.
Consumer Spending
Net Exports of Goods &
Services
-3.6%
2014 2015 2016 2017 2018 2019 2020E 2021f
Data Source: SunTrust IAG, Bureau of Economic Analysis, Bloomberg, IHS Markit. Figures are year-over-year
percent change of real gross domestic product. Contributions to percent change in real gross domestic product,
actual for 2014 through 3Q 2020.
E = Bloomberg consensus blended estimate for 2020
f = SunTrust IAG forecast for 2021Much Faster Job Recovery Than Past Two Recessions
Should Continue to Support Economic Growth
From an employment perspective, this Number of US Workers
is not a typical recession and will not (Millions)
be a typical recovery. Following the
+55%
2008-2009 recession, it took roughly 160
Recovery
4.5 years to recover the jobs lost. In in 7
just seven months (through Months
November), the US has already 150
regained more than 55% of the jobs
lost.
140
We expect the unemployment rate to
drop from 6.7% currently to below 130
5.5% by the end of 2021.
-2.6 million over -8.7 million over -22.2
2.5 years 2 years million in 2
120 Months
110
100
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Data Source: SunTrust IAG, Bloomberg, Bureau of Labor StatisticsElevated Household Savings Provide Consumers a Buffer
and Suggest Pent Up Demand Remains
Americans have saved the bulk of the Annual Change in Bank Deposits
cash received through the CARES Act, ($Trillions)
including the stimulus checks and tax $3.0
relief. It has been squirreled away in $2.7
bank deposits, which have topped $16
$2.5
trillion. The annual change is roughly
$2.5 trillion, or approximately 14% of
US gross domestic product. $2.0
$1.5
$1.0
$0.5
$0.0
-$0.5
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Data Source: SunTrust IAG, Bloomberg, Federal Reserve Board. Monthly data; 2020 data through November.Consumer Still Holding Up Well
$600
US Retail and Food Sales Personal Savings Rate
40%
35%
$500
30%
$400 25%
$ Billions
20%
$300
15%
Average = 6.5% 13.6%
10%
$200
5%
$100 0%
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020
Household Debt Service Ratio* US Credit Cards: Charge-Offs Rate
14% 12%
10%
12%
Average = 11.2%
8%
10% 6% Average = 4.7%
4%
8% 8.7%
2%
1.9%
6% 0%
2000 2005 2010 2015 2020 2000 2004 2008 2012 2016 2020
Data Source: SunTrust IAG, Bloomberg, Haver
*Household Debt Service Ratio is the ratio of total household debt payments to total disposable incomeEquities
Stock Market Outlook: Bear Versus Bull Case
Our work suggests we are in a multi-year bull market, supported by an economy which is in the early stages of
expansion. Stocks, though, are transitioning to a more moderate phase of the bull market that is supported by earnings.
Elevated investor expectations and vaccine deployment execution are among the primary risks to our outlook, and we expect
markets to move in a two steps forward, one step back fashion.
BEAR CASE VS. BULL CASE
Economic growth uneven and elevated COVID-19 cases Economy spring loaded awaiting vaccine
Relative valuations still favor stocks;
Market valuations are elevated
earnings strength underappreciated
Market prices and investor expectations are stretched Strong momentum a positive longer term
Uncertainties remain Unprecedented stimulus reducing outlier risk
Data Source: SunTrust IAGNext Phase of Bull Market Begins
The first phase of this bull market, which should be the strongest from a return standpoint, is likely over. Equities have been
supported by massive monetary and fiscal stimulus as well as a reversion from a downside price overshoot. In the next
phase, we expect positive but moderating returns, sustained by improved fundamentals and earnings.
Bull Market Phases:
Median Returns by Quintile
All Bull Markets Since 1957 3 Strongest Bull Markets (1982, 1987, 2009)
First Phase of Bull
60% Final Phase of Bull
37%
33% 35%
17% 17%
13% 14%
9%
6%
1st Quintile 2nd Quintile 3rd Quintile 4th Quintile 5th Quintile
Data Source: SunTrust IAG, Bloomberg; Past performance does not guarantee future results.Upside Remains Based on Past Bull Markets
S&P 500 Bull Markets Price Change S&P 500 Bull Markets Duration
Since 1957 Since 1957
179%
5.8 Years
5 Years
101%
68%
9 Months
Current
Current Average Median Current Average Median
Current based on 12/31/20 peak
Data Source: SunTrust IAG, FactSet
Past performance does not guarantee future results.Our View of a Multi-Year Bull Market Is Consistent
with the Early Stages of an Economic Expansion
The average economic expansion since WWII has lasted more than five years, and stocks tend to rise the majority of the time
when the economy is growing. Moreover, 65% of the time, stocks have risen 10% or more during expansions.
Length & Strength of Previous % of Time S&P 500 Has Risen During
160 US Economic Expansions Economic Expansions
1961-1969
85%
Strength: Cumulative GDP Growth
150
1991-2001
140 1982-1990 65%
130 2009-2020
Current 39%
120
110
6%
100
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 Decline of at Least Positive Return Return of 10% or Return of 20% or
10% Greater Greater
Length: Number of Quarters in Expansion
Data Source: SunTrust IAG, Haver, Morningstar; Left Chart: GDP for current = 3Q 2020 actual GDP plus
consensus estimate of 4% annualized for 4Q 2020. Right chart study covers period since 1927 and is based on
rolling one-year total returns. Past performance does not guarantee future results.Our 2021 Economic Outlook of Solid Growth and Modest
Inflation Should Be a Good Market Backdrop
Since 1950, there have been 10 years S&P 500 Total Return During Years of Solid
where the US economy grew between Economic Growth & Modest Inflation
3% and 5% and inflation stayed (US GDP 3% to 5% and Inflation 1% to 3%)
between 1% and 3%, similar to our
expectation for 2021. In all cases,
stocks rose for the year, with an
33%
average gain of 19%.
29%
23% 23%
21%
18% 18% Average
19%
11%
8%
1%
1952 1963 1986 1992 1994 1996 1997 1998 1999 2004
Data Source: SunTrust IAG, Minneapolis Fed, St. Louis Fed
Past performance does not guarantee future results.Strong Market Momentum Is a Good Sign Looking Out 12
Months
In November, the S&P 500 posted a
S&P 500 Price Returns Following >10% Months
monthly return in excess of 10% for
the second time in 2020 and only the Date 3 Months Later 6 Months Later 12 Months Later
13th time since 1950. Historically, this
11/30/1962 3% 14% 18%
has been a good sign, with stocks
averaging 13% gains over the next 10/31/1974 4% 18% 20%
year. 1/31/1975 13% 15% 31%
1/31/1976 1% 3% 1%
Notably, similar big months were seen 11/30/1980 -7% -5% -10%
early in the bull markets that started in
1962, 1974, and 1982 as well as 8/31/1982 16% 24% 38%
coming out of 2011’s US debt 10/31/1982 9% 23% 22%
downgrade-related market correction. 8/31/1984 -2% 9% 13%
1/31/1987 5% 16% -6%
12/31/1991 -3% -2% 4%
10/31/2011 5% 12% 13%
4/30/2020 12% 12%
11/30/2020
Average 5% 12% 13%
% Positive 75% 83% 82%
Data Source: SunTrust IAG, FactSet
Past performance does not guarantee future results.US Valuations Range Bound Since June, While
Earnings Strength Underappreciated
S&P 500
4000
Valuations remain elevated for 3800
markets and are likely to stay that 3600
way given the low rate environment,
3400
lack of attractive investment
alternatives and monetary 3200
stimulus. 3000
2800
What appears to be Forward Price-to-Earnings
underappreciated is that market 24x
23.4
valuations have been range bound 23x 22.5
22.4
since June. The driver of market
22x
returns since then has been the
21.6
sharp rise in earnings. 21x
20.9
20x 20.4
Forward 12-Month Earnings Estimates
$170
$165
$160
$155
$150
$145
$140
Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
Data Source: SunTrust IAG, FactSet
Past performance does not guarantee future results.We Expect a Strong Earnings Snapback
While the timing will partially be S&P 500 Forward 12-Month Earnings Estimates With Trend
dependent on the vaccine rollout, our
view is that earnings should quickly
revert to pre-pandemic levels.
200
Surviving companies are set to
emerge from this crisis as more
efficient and more profitable than ever,
aided by the acceleration of
technology and productivity trends 150
and declining interest expense.
Accordingly, we view it as very likely
that earnings will quickly rebound 100
closer to the longer-term trend—$190
to $200 by 2022—up from the 2021
earnings estimate of $169 (which also
has upside potential).
50
0
2006 2008 2010 2012 2014 2016 2018 2020 2022
Data Source: SunTrust IAG, FactSet
Past performance does not guarantee future results.Market Transitioning to Earnings-Led Recovery
In 2021, the market is set to transition S&P 500 Consensus Estimated Earnings Growth (%)
to an earnings-led recovery. While
consensus earnings estimates have
tended to be overly optimistic, we view
current projections as realistic, if not 20.9
22.1
low.
16.8
11.9
0.5 1.0
-16.0
2016 2017 2018 2019 2020 2021 2022
Data Source: SunTrust IAG, FactSet
Past performance does not guarantee future results.Stocks Still Appear Attractive on a Relative Basis
The equity risk premium (ERP)* suggests stocks remain attractive on a relative basis and is in a zone that has seen stocks
outperform bonds by double digits, on average, on a 12-month basis. Furthermore, the trailing earnings yield is currently
artificially low given the pandemic-related collapse in profits which should improve sharply in 2021.
S&P 500: Equity Risk Premium: Average 12-Month Forward S&P 500 Excess Return
Earnings Yield Minus 10-Year Treasury Yield Over the 10-Year Treasury Return
by ERP Tranche
800 (1960-Current) Current
13.1%
600 Stocks More Attractive
10.3%
400 5.9%
5.3%
3.5%
200 1.0%
Average = 67 229
0
Based on rolling four-quarter returns
-200
-400 -9.1%
Stocks Less Attractive
-600 Less Than -200 -100 0 100 200 Greater
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 -200 to -100 to 0 to 100 to 200 to 300 Than 300
*The equity risk premium (ERP) compares the earnings yield of stocks (inverse of the P/E ratio) to the 10-year
US Treasury yield. ERP is quantified in basis points (bps). One basis point = 0.01%
Data Source: SunTrust IAG, Haver, Morningstar, FactSet
Past performance does not guarantee future results.Stock Market Dividend Yield Advantage Relative to
10-Year US Treasury Remains Elevated
S&P 500 Dividend Yield Minus 10-Year Treasury Yield
10
5
0
-5
-10
-15
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Data Source: SunTrust IAG, Morningstar, Haver
Long-term yield history uses a 65%/35% blend of the IA SBBI Intermediate-Term Govt and IA SBBI Long-
Term Govt yields from 1/1950-3/1953 to replicate the 10-year Treasury yield, the monthly average 10-year
Treasury yield from 4/1953-12/1961 and, thereafter, the US 10-year Treasury month-end yield.
Past performance does not guarantee future results.Investor Complacency a Market Risk in the First
Quarter of 2021
Markets bottomed in March 2020 when fear was high and the hurdle rate for positive surprises was low. Following the sharp
market rebound, investor expectations have risen, and stocks are more vulnerable to bad news.
*AAII Individual Investors: Demand for Downside Stock
% Bearish Protection at 20-Year Low
(21-Day Average CBOE Equity Put/Call Ratio)
1.00
60% Fear
0.90 Fear
50%
0.80
40% 0.70
Average
30% 0.60
0.50
20%
Greed 0.40
Greed
10% 0.30
0% 0.20
Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20
Data Source: SunTrust IAG, FactSet, American Association of Individual Investors, CBOE
*The AAII Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and
neutral on the stock market short term. The Put/Call Ratio is a widely used indicator of bullish or bearish
market sentiment. When the ratio of puts, which are the right to sell an asset, to calls, which are a right to buy,
is low this suggests a degree of investor complacency and overconfidence.
Past performance does not guarantee future results.Markets Should Continue to Move Two Steps
Forward, One Step Back
Although our view is that the path of least resistance for the market over the next 12 months remains higher, we expect
bouts of volatility as the carousel of concerns continues to turn, including the potential for hiccups with vaccine logistics and
distribution.
4000 S&P 500 Price & Pullbacks
3500
-9.6%
3000
-7.1%
-6.1%
2500 -6.8% -6.1%
-10.2%
-19.8% -33.9%
2000
-5.6%
-7.4% -12.4% -13.3%
1500 -5.8%
-5.8%
-9.9% -7.7%
1000
500
2012 2013 2014 2015 2016 2017 2018 2019 2020
Data Source: SunTrust IAG, FactSet
Past performance does not guarantee future results.Large Cap Value Trends Stabilizing
After significant underperformance, Large Cap Value Relative to Large Cap Growth
large cap value’s price and earnings Price & Earnings Trends
trends relative to large cap growth are
stabilizing. Relative Price Relative Earnings
120
Our first step in the fall was to
neutralize our portfolios’ tactical
growth tilt by creating a barbell
100
between small caps and large cap
growth; our work suggests small caps
are a better hedge for the reflation
trade relative to large cap value. If 80
there are some hiccups with the
vaccine distribution, growth stocks
should benefit.
60
That said, further improvement in
relative earnings and price trends are
among factors we are monitoring to
40
upgrade our large cap value position. Dec-17 Dec-18 Dec-19 Dec-20
Data Source: SunTrust IAG, FactSet
Growth = Russell 1000 Growth; Value = Russell 1000 Value
Investments in small-sized companies may involve greater risks than in those of larger, better known companies.
Returns on investments in stocks of small companies could trail the returns on investments in stocks of larger
companies.
Past performance does not guarantee future results.Overweight Small Caps: Catch-Up Potential Remains
Given Valuation Extreme & Rising Earnings
1-Year Rolling Returns:
S&P Small Caps Price-to-Earnings Ratio
S&P Small Caps Minus Large Caps
40% Relative to Large Caps Lowest Since 2001
30% 1.4
20% 1.3
10% 1.2
0% 1.1
-10% 1.0 Average
-20% 1 Standard Deviation Small Cap Underperformance 0.9
0.8
-30%
0.7
-40%
0.6
-50%
0.5
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Small Caps Forward Earnings Trends Small Caps Price Trends Relative
Relative to Large Caps Improving to Large Caps Improving
105
115 100
105 95
90
95
85
85
80
75 75
65 70
65
55
Jan-20 Feb-20 Apr-20 May-20 Jul-20 Aug-20 Oct-20 Dec-20
Jan-20 Feb-20 Apr-20 May-20 Jul-20 Aug-20 Oct-20 Dec-20
Data Source: SunTrust IAG, FactSet
Small Caps = S&P 600; Large Caps = S&P 500
Investments in small-sized companies may involve greater risks than in those of larger, better known companies.
Returns on investments in stocks of small companies could trail the returns on investments in stocks of larger
companies. Past performance does not guarantee future results.Small Caps Have More Cyclical Exposure Relative to
Large Caps and Large Cap Value
Comparison of Sector % Weight: S&P Small Cap, Large Cap, Large Cap Value
S&P Small Cap Russell 1000 Value S&P 500
30
28
S&P Small Cap has more weight in Industrials &
25 Materials (23%) as well as Discretionary (15%)
19
20
17
16
15 15 S&P Small Cap has
15 13 13 13
13 less in the most
12
defensive sectors (6%)
10 11
10 10
10 8
8 8 8
7
6 5
5 4 4
5 4
3 3 3 3
2 2
2
0
Industrials Materials Energy Discretionary Financials Technology Comms. Real Estate HealthCare Staples Utilities
Services
Data Source: SunTrust IAG, FactSet
Small Caps = S&P 600; Large Caps = S&P 500; Large Value = Russell 1000 Value ETF
Investments in small-sized companies may involve greater risks than in those of larger, better known
companies. Returns on investments in stocks of small companies could trail the returns on investments in
stocks of larger companies.
Past performance does not guarantee future results.Regional: Valuations & Earnings
We hold a US equity bias and expect the US to maintain a premium valuation relative to the globe. US profits were
stronger relative to those of other regions prior to the decline and are rebounding more quickly. This is because US
stocks’ blue chip bias and sector composition are geared more toward defensive and growth-oriented areas.
Global Earnings Current Forward P/E and Range Since 2003
Indexed at 100 as of 12/31/2017
Average Current
130 US EAFE Eurozone Japan EM
35x
120 30x
US
110 25x
23.5
100 20x 18.3
EM
17.5 17.6
90 15x
15.4
EAFE
Eurozone
80 Japan 10x
70 5x
2017 2019 2020 US EAFE Eurozone Japan EM
Data Source: SunTrust IAG, FactSet, MSCI
Past performance does not guarantee future results.
Earnings are next twelve months’ earnings in local currency.
US = MSCI USA; Japan = MSCI Japan; EAFE = MSCI EAFE; EM = MSCI EM; Eurozone = MSCI EMUGlobal Earnings Momentum Is Broad Based and
Similar to the Exit from the Financial Crisis
Global Markets:
% of Countries With Rising 3-Month Earnings Trends
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Data Source: SunTrust IAG, FactSet, MSCI
Past performance does not guarantee future results.Int’l Developed Markets: Still Underweight but Slightly
Better Outlook
The relative valuations for international developed markets are at the low end of their historical range, and the hurdle rate for
positive surprises is low. However, we are not as bearish on the US dollar relative to the consensus (a weaker dollar tends to
coincide with US underperformance), and we await an improvement in earnings and price trends before shifting our view.
Int’l Developed Markets Int’l Developed Markets
1.10 Price-to-Earnings (P/E) Relative to US Forward Earnings Relative to US
105
1.05
100
1.00
Int’l Expensive 95
0.95
90
0.90
85
0.85
Declining line = Int’l EPS
80 weakening relative to US
0.80
Int’l Cheap
0.75 75
0.70 70
2006 2008 2010 2012 2014 2016 2018 2020 2016 2017 2018 2019 2020
Data Source: SunTrust IAG, FactSet
US Equities = MSCI USA; Int’l Developed Markets Equities = MSCI EAFE
International investments are subject to special risks, such as political unrest, economic instability, and
currency fluctuations.
Past performance does not guarantee future results.Emerging Markets’ Valuations Neutral but Earnings
and Price Trends Stabilizing
Emerging Markets EM Relative to US
Price-to-Earnings (P/E) Relative to US Both Indexed at 100=12/31/2014
0.80
Relative Forward Earnings (l-axis) Relative Performance (r-axis)
EM Expensive 110 120
0.75
105 110
Average 100
0.70 100
95
90
90
0.65
80
85
EM Cheap 70
0.60 80
75 60
0.55 70 50
2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020
Data Source: SunTrust IAG, MSCI, FactSet. US = S&P 500; EM = MSCI EM
Emerging Markets: Investing in the securities of such companies and countries involves certain considerations
not usually associated with investing in developed countries, including unstable political and economic
conditions, adverse geopolitical developments, price volatility, lack of liquidity, and fluctuations in currency
exchange rateEmerging Markets’ Trends Improving Relative to Int’l
Developed Markets
Emerging markets’ (EM) forward EM Forward Earnings and Price Trends Relative to
earnings and price trends are moving Int’l Developed Markets
higher relative to the international
EM Forward Earnings Relative to Int'l Developed Mkts
developed markets. This has been 125
driven by better earnings in Asia, such EM Price Relative to Int'l Developed Mkts
as in China, Taiwan and South Korea,
relative to Europe. 120
115
110
105
100
95
90
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20
Data Source: SunTrust IAG; FactSet, MSCI; relative series indexed at 100 as of 12/31/2018
Forward earnings are in local currency while price trends are in US dollars.Active Management Increasingly Important in
Emerging Markets
With China accounting for nearly 40% of the emerging markets index and a notable variation in country performance, we see
greater value in active management in this asset class.
Emerging Markets Composition Emerging Markets 2020 Performance
50%
40%
30%
20%
China, 39%
10%
0%
India,
-10%
9%
-20%
Taiwan,
13% S. Korea, -30%
13%
Mexico
Hungary
Philippines
Indonesia
Russia
India
Greece
Argentina
Brazil
Turkey
China
Kuwait
Thailand
Pakistan
Korea
Czech Republic
Peru
Poland
Colombia
Malaysia
South Africa
Chile
Taiwan
Egypt
Saudi Arabia
Asia
Latin America
EM Europe
Middle East &
Africa
Data Source: SunTrust IAG, FactSet, MSCI
Emerging Markets: Investing in the securities of such companies and countries involves certain considerations
not usually associated with investing in developed countries, including unstable political and economic
conditions, adverse geopolitical developments, price volatility, lack of liquidity, and fluctuations in currency
exchange rateFixed Income
Recovery To Lift US Yields Later in 2021, Though Tug of
War To Continue
To start 2021, we expect the upside in 2-, & 10-Year US Treasury Yields
yields to be limited by the Federal 2-Year 10-Year
Reserve’s (Fed) quantitative easing 3.5%
and investor demand for US yields. 3.24%
However, the expected delivery of a
vaccine and heavy US Treasury 3.0%
issuance will likely support somewhat
2.63%
higher yields as we move through next
year. Fed policy rates will keep short- 2.5%
term yields anchored near historic
lows. 1.92%
2.0%
1.5%
0.92%
1.0%
0.5%
0.55%
0.12%
0.0%
2015 2016 2017 2018 2019 2020
Data Source: SunTrust IAG, Bloomberg
Data as of 12/31/2020
Past performance does not guarantee future results.Normalizing US Inflation Expectations Support Higher
Yields in 2021
Following the sharp rebound from 2-, 5-, & 10-Year US Breakeven Yields
depressed levels, the US inflation outlook
2-Year BE 5-Year BE 10-Year BE
will likely oscillate over the coming year.
While the Fed’s inflation objective and
the economy’s firmer footing may boost 2.0%
inflation expectations, the US will also
have to navigate disinflationary
pressures created by the pandemic and 1.5%
elevated unemployment levels.
1.0%
0.5%
0.0%
-0.5%
-1.0%
Data Source: SunTrust IAG, Bloomberg
Past performance does not guarantee future results.Yield Curve Has Further to Steepen, Likely At More
Gradual Pace Relative to History
Historically, the 2/10-year curve’s 2/10-Year Curve Pre- and Post-Recessions (in basis points)
slope steepens on average by 180
basis points in the first two years '81, '90, '01, & '08 Recessions 2020 Historical Average 2020 Trend
following the onset of a recession. 300
Thus far, the curve has steepened by
80 basis points, suggesting a 250
steepening bias should prevail in 2021.
200
However, we expect the Fed to 150
continue its large asset purchases
next year, which should partially offset 100
the upward momentum.
50
0
-50
-100
-150
-200
-250 -200 -150 -100 -50 0 50 100 150 200 250 300 350 400 450 500
Trading Days From Recession Onset
Data Source: SunTrust IAG, Bloomberg
Data as of 12/31/2020
1 basis point = 0.01%
Past performance does not guarantee future results.The US Debt Binge 2.0 Should Fuel Some Upside
Pressure in Yields
In 2020, annual US Treasury issuance surpassed its previous record by more than $6 trillion to fund fiscal stimulus. In 2021,
elevated US Treasury supply will continue to instill some upward yield pressure. The favorable yield environment will likely
also fuel another busy year of corporate debt issuance.
US Treasury Issuance ($Billions) US Corporate Bond Issuance ($Billions)
$20,000 IG Corp HY Corp
$18,000 $2,500
$16,000
$14,000 $2,000
$12,000
$1,500
$10,000
$8,000
$1,000
$6,000
$4,000 $500
$2,000
$- $0
10-Year Avg Prev Record 2020 10-Year Avg Prev Record 2020
Data Source: SunTrust IAG, Bloomberg
Corporate bond issuance is represented by the US Investment Grade and US High Yield Corporate Bond Total
Volume Index
YTD 2020 US Treasury Issuance data as of 11/30/2020
Past performance does not guarantee future results.Although We Expect Higher Rates, Fed Asset Purchases
to Restrain Upside
We expect the Fed’s 2021 playbook to Fed Balance Sheet Items ($Trillions)
emphasize purchases of US US Treasuries (l-axis)
Treasuries and agency mortgage- Mortgage-Backed Securities (l-axis)
backed securities over its emergency Fed Lending Facilities (r-axis)
$5.0 $0.25
lending facilities. The Fed will remain a
key source of demand for US debt $4.5
with the goal of preserving
accommodative conditions via low $4.0 $0.20
rates.
$3.5
$3.0 $0.15
$2.5
$2.0 $0.10
$1.5
$1.0 $0.05
$0.5
$0.0 $0.00
Jan-20 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20
Data Source: SunTrust IAG, BloombergExpect Fed to Emphasize Longer-Dated US Treasury
Purchases
We expect the Fed to extend the US Treasury Curve Slopes (in basis points)
weighted-average maturity of its
2/10-Year Curve 5/30-Year Curve
monthly US debt purchases to help
contain long-dated US Treasury yields.
The Fed would be a powerful source 275
of demand within the longer regions of
the yield curve. Its participation should
225
soften the upward rate pressure
created by robust US government debt
issuance. 175
125
75
25
-25
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Data Source: SunTrust IAG, Bloomberg
Data as of 12/31/2020
1 basis point = 0.01%
Past performance does not guarantee future results.You can also read
