Abundant liquidity means that there is "plenty of cash that can buy the dip", so we doubt that any correction in risk assets will go too far. Once we can look beyond this new Delta-variant wave, there may be calmer waters ahead and so this looks like a good time to build and hold positions, with an eye on the medium term rather than overreacting to short-term price volatility.
- We continue to see the global economy accelerate in the second half of 2021 as pandemic headwinds fade and service sector activity normalizes.
- The recent debate has been taken up by inflation risk. Rising commodity prices, supply chain problems (such as semiconductors), declining global trade and trade rigidities resulting from Covid restrictions, (as well as a basis for comparison issue), are cited as reasons for rising inflation, many of which have "transitory" characteristics.
- While it is to be expected that the Fed will consider beginning to taper its QE in the coming months given falling unemployment levels and rising inflation, this process will be very gradual and it may take many more months before interest rates are raised. An early withdrawal of stimulus would be totally counterproductive today, as the reduction in liquidity would cause asset prices to fall, hamper consumer confidence (already eroded) and further contract economic growth.
- Risks to recovery are another round of the virus, which is unlikely given the progress of the vaccination process. A credit crunch in a highly leveraged world also appears as a potential problem, but hard to imagine given the liquidity of the economy. That liquidity is bolstered by the $4 trillion growth in the money supply.
- Is the market overvalued? Yes, but not as much as in other more speculative cycles and stocks still offer a high premium to prime rates. Otherwise, corporate earnings visibility has improved tremendously, with global earnings recovery (MSCI World) expected to be close to 45% by 2021.
