Wealth and asset managers expect a stronger economy and are positioning for equity market gains, encouraged by vaccine development. An uncertainty, however, is how rapidly or slowly vaccines will be rolled out.

The consensus is clear: US financial service firms are expecting the global economy to come roaring back to life, sustaining an already frothy bull market.

Asset managers also agree that the recovery - and an extended run-up of equity prices - hinges on bringing the COVID pandemic to heel, most notably through the success of new vaccines about to be rolled out.

Wells Fargo, Vanguard and LPL Financial - three of the largest financial firms in the US - all released their 2021 investment outlooks this week and all three made a strong case for a continuing bull run. A strong recovery in 2021 “should support an earnings rebound, sending equity prices to record highs,” according to Wells Fargo Investment Institute’s 2021 Outlook: Forging a Path Forward.

Market forecasts
Vanguard and LPL were slightly more cautious. 

Vanguard’s Economic and Market Outlook 2021 anticipates global equities to “continue to outperform most other investments and the rate of inflation” but it is “more conservative” on the outlook for US equities, predicting returns ranging between 3.5 per cent and 7 per cent over the next decade.

LPL’s 2021 market report, Powering Forward, contends that strong earnings “may allow stocks to grow into somewhat elevated valuations” as the S&P 500 Index hits a fair value target range of 3,850 to 3,900.

Pandemic risks
The financial powerhouses cautioned that optimistic market forecasts are dependent on the effectiveness of the newly introduced vaccines and containment of the virus.

Vanguard’s 2021 outlook “is predicated on positive health outcomes for the broader population, as a healthy economy begins and ends [with] human health,” said Joe Davis, the firm’s global chief economist and head of its investment strategy group.

Pandemic containment efforts “that are stringent enough to reverse the recovery, leading to a double-dip recession,” pose the biggest risks, Davis said.

Fixed income outlook    
But central banks are expected to keep interest rates low next year, the three firms agreed.

LPL, the largest independent broker-dealer in the US, foresees the 10-year yield finishing 2021 in a range of 1.25 per cent to 1.75 per cent “with a bias toward the lower end.”

Record fixed income supply, accommodative monetary policies and additional government deficit spending are all “likely to continue through at least the half of 2021,” according to Wells Fargo’s report.

Longer debt maturities will rise modestly but interest rates “should remain at low levels for the foreseeable future,” Brian Rehling, Wells’ head of global fixed income strategy, said at a press briefing. As a result, the “demand for yield will be extensive and [the cash investors have on the sidelines] will look for a home.”

Investors seeking yield should consider corporate bonds, actively managed lower quality investments and preferred securities, Rehling said.

Yield curves may steepen, according to Vanguard, but “short-term rates are unlikely to rise in any major developed market.” The firm, which manages $6.3 trillion, expects bond portfolios to earn returns “close to their current yield levels.” Higher than expected inflation will be “the greatest risk factor” for the fixed income market, Vanguard said.

COVID impact
The pandemic “irreversibly accelerated trends such as work automation and digitization of economies,” Vanguard’s report concluded. “Assuming a reasonable path for health outcomes, the scarring effect of permanent job losses is likely to be limited.”

While a post-COVID 2021 will be a “restart,” according to Burt White, LPL’s chief investment officer, it won’t be the “same world we left behind in 2019. There has been damage to areas of the economy that may never fully recover, but there are other areas that will adapt, reinvent themselves and help reinvigorate growth.”