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We have a very positive economic outlook for 2021, but we believe allocation decisions are key to balancing market opportunity with nuanced risks this year.
We have received many questions recently on our outlook for interest rates, inflation, and fixed income. We see near-term risks to fixed income returns and weigh those risks against the role fixed income plays in balanced portfolios and our active positioning of fixed income allocations.
Amid global economic recovery from the COVID-19 pandemic, we see early-cycle opportunities for select U.S. sectors and overseas geographic regions in 2021.
The COVID-19 pandemic ended a decade-long bull market, but the COVID bear market reversed almost as quickly as it began. 2020 has since been a story of resilience and recovery, with risks and opportunity along the way.
Biden’s win is significant in many ways, but we believe the likely outcome of divided government may be more impactful for markets and the economy. Compared to a sweep by either party, split power with smaller majorities in each house of Congress provides little path for a party to implement extreme policies. Looking forward, we remain focused on the sector impacts of the election outcome.
The COVID-19 pandemic and the U.S. election are near-term risks, but we expect economic growth will continue with market leadership shifting toward sectors and regions that benefit from cyclical tailwinds.
Election uncertainty is high, with polls in question after 2016 and prediction markets recently near even odds, but we believe lack of a strong consensus reduces the risk of a market-dislocating surprise. Thus, we are focused on potential sector impacts of various election scenarios.
There has been a strong pickup in economic activity in recent weeks, which the markets seem to have anticipated. We believe our portfolio positioning balances the potential opportunity from a continued market rebound against ongoing risks.
In terms of initial impact, the COVID-19 pandemic may be the greatest economic shock in living memory. For markets, given the damage to date, we believe we may be closer to the end than the beginning of the downturn, and we are seeking to manage risk around the potential inflection point.
We anticipate positive economic growth and market returns in 2020, though moderate growth faces risks and equity returns are unlikely to match 2019 levels.