According to Orlando, the recession ended in the second quarter of last year. “We felt that the powerful momentum that we saw coming out of it would continue at a somewhat slower pace this year, taking the S&P up to a 4,500 level, and we’re running at about 4,250 or so. So, from the bottom last March, we’re up about 94%, which is extraordinarily strong recovery.”
Corporate earnings overall, including those at Federated Hermes, make illustrating the rebound easy, he said. “The Bloomberg consensus for the first quarter was up 23% year over year. We thought we’d be up maybe 30% to 35% at Federated. We ended up seeing close to a 48% increase in first-quarter earnings. And we’re not done. Second-quarter earnings look like they’re going to be up 60% to 70%, which is phenomenal.”
“We’re also looking at the best GDP numbers since 1984,” said Orlando, referencing the Fed’s decision yesterday to take its GDP estimate up to 7%.
What does that mean from an asset allocation standpoint? “We were very much in the large-cap growth camp coming out of the trough of this horrific pandemic. Technology and growth in our view got ahead of themselves. By the time we got into August of last year, we locked those profits in and rotated them to three underperforming areas—domestic large-cap value, domestic small-cap and international. Those categories have performed very well over the last nine months or so. That’s a trade and trend we think has legs,” Orlando said.
As for the bond market, “there’s only a little complacency,” Kelly said. The gap between 10-year nominal bonds and 10-year TIPS is about 2.3%, so bond market investors are pricing at about 2.3% inflation over the next 10 years.
But what’s really interesting is how low real yields are, Kelly added, saying that 10-year TIPS are paying a real yield of about 90 basis points. “We don’t think that can last. I think by the end of the year we could be at a 2% 10-year Treasury yield,” Kelly said.
Orlando agreed. “We feel like Treasury yields should be up at 2% to 2.5% by the end of this year. If we’re wrong, yields will be higher a year from now,” he added.