While the world seems focused on the emergence of new variants of COVID-19, central bank policies will be the driver of continued global economic growth.
This will require a delicate balance between keeping inflation expectations in check and maintaining support for continued expansion. While the recovery is widely expected to continue, we expect growth to slow as the global rebound ages. Inflation, driven by labor and supply shortages and higher global demand as pandemic restrictions have eased, has proven to be stickier than many economists expected and will take some time to moderate.
The prospect of central bank policy changes coupled with valuations that now exceed pre-pandemic levels has created a guarded outlook for global equity returns. The outperformance of US equities and current valuations increases the probability that international equities will outperform in the future. Value stock prices remain very attractive compared to growth by historical standards.
Low interest rates that have risen modestly over the past year make fixed income investments somewhat more attractive. Inflation-protected bonds may be less attractive than last year with inflation expectations somewhat moderated, but may remain a valuable hedge against unexpected inflation, particularly within income-producing portfolios.
Avoid extrapolating future results from the recent past, as it is unlikely that the combination of low interest rates, low inflation, and a healthy appetite for risk will combine to drive valuations further away from historical norms. The best hedge against inflation is not the asset class with the highest short-term correlation to CPI; instead it is consistent exposure to equities over time.
During times of uncertainty, having a plan is of paramount importance. Learn more through a conversation with one of our CERTIFIED FINANCIAL PLANNERTM professionals.
Please take a moment to view our Q4 2021 Market Review.
J. Brent Everett
Chief Investment Officer
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