Though recent Fed comments have seemingly settled investors’ nerves, many remain wary about possible rate increases or asset purchase tapering. The central bank’s messaging will remain one of the most significant near-term risks.
With the clock started on the legislative battle for an infrastructure package, investors should expect news related to its progress to move markets.
New Covid cases and varying vaccination rates across the globe could also create volatility for global equity markets. On a related note, incrementally better news out of the U.S., combined with incrementally worse news elsewhere, has led to a recent strengthening of the U.S. dollar. This is likely to create near-term headwinds for emerging markets.
Best Ideas
We see continued tactical opportunities in growth and technology stocks, as investors with lofty expectations may be unimpressed by first quarter earnings. In the near term, we continue to favor consumer service sectors, especially in areas where unemployment remains elevated, and we are keeping an eye on industrials that could benefit from publicly funded infrastructure investments. We remain bullish on U.S. small caps, emerging markets and cyclicals for the longer term as the economy reopens, but think those areas could be subject to volatility over the coming months.
In Focus: Higher Inflation Has Arrived...Temporarily
Annual U.S. inflation readings have moved higher, thanks largely to comparisons with last year’s recessionary environment. Monthly inflation has also climbed, primarily as a result of higher energy prices, with gasoline rising 9.1% in March alone. The year-over-year comparison effect will likely be even more powerful in April’s reports (especially for energy), which will almost certainly push headline inflation above 3% and core inflation above 2%. But this will almost certainly be transitory.
Monthly inflation data could remain elevated, however, as surveys of both large and small businesses indicate that pricing pressures are a concern. While half of March’s inflation is attributed to gasoline, the other half is largely due to service industries: hotel stays, sporting event admission, car insurance and public transportation have all seen cost increases above historical averages. However, these prices are still below their pre-pandemic peaks. We think we are in a reflationary environment as demand slowly returns to normal, rather than in one of exploding inflation. We expect inflation to recede, possibly by the start of the fourth quarter.
In this environment, we prefer areas of the market that are strongly levered to the economy and interest rates, such as financials, industrials and consumer services. We would avoid companies that have already priced in a recovery or that lack quality fundamentals.
Saira Malik is head of global equities at Nuveen.