• Unease coming from the bond market

There is, though, nervousness coming from the bond market. U.S Treasury yields are rising, thanks to a complex mix of inflation fears, fear of oversupply and expectations of further dollar weakness (all of which inter-react). Higher risk-free returns from U.S Treasuries offer investors an alternative to equities, and also raise the discount rate by which companies are valued (ie, raising the hurdle that makes a long term investment in a company worthwhile).

• But these fears are exaggerated

First, inflation. While supply blockages and higher energy prices will contribute to higher prices, they are expected at be one-off in nature. Demand-led inflation is non-existent at present in the industrialised world, with pay growth minimal and precautionary savings likely to remain high well into the recovery cycle (since bankruptcies and unemployment are lagging features of the cycle). U.S long-term inflation expectations remain modest at 2%, exactly on the Fed’s target inflation rate*.

It could be added that, should inflation take off, equities offer some protection from companies’ ability to pass on rising input prices to consumers, even has higher bond yields will erode their relative attractiveness.

• Second,

The U.S Fed and other major central banks remain committed to keeping yields low through bond purchase programs and ultra-low, and negative, interest rates. This policy is unlikely to be reversed in 2021, with central banks everywhere nervous of premature tightening of monetary policy. This creates an artificial scarcity of bonds relative to demand, keeping prices high (and yields low), and arguably contributes to a mispricing of risk. But no one is going to be upsetting this apple cart in the near term.

• Cyclical stocks

Ongoing loose monetary policy in the west is one of the three legs supporting equities, and in particular recovery plays amongst cyclical sectors. The second leg is loose fiscal policy, as demonstrated by the Georgia senate election on 5^th January, when U.S and global cyclical stocks jumped as control of the upper house went to the Democrats. The Democrats will now find it much easier to pass a large fiscal stimulus package, and the outlook is good for an infrastructure spending bill. Both will boost domestic demand, adding stimulus to the U.S economy and to global trading partners.

The third leg of the cyclical story is China. Last year the country’s GDP grew at 2.3%, while the rest of the world economy shrunk by approximately 4%. China demand was an important contributor to the recovery seen in global demand in the summer and autumn of last year, and it is hoped that strong and stable demand growth will continue this year.

As a result of investor interest in economically-sensitive stocks, U.S and global industrial cyclicals, commodity-related areas, banks and those stock markets with a high a proportion of such stocks, such as the Japanese and U.K markets, may outperform in 2021.

• U.S presidential elections fox the forecasters

In 2016, consensus amongst financial commentators was that a Trump victory in the November election would lead to a sell-off on Wall Street. Instead, after a brief wobble, the U.S stock market began a rally that lasted well into 2017.

Last year, consensus was that a Biden presidential victory would lead to a stock market sell-off, on fear of higher business taxes and increased regulation. Instead, stocks rallied, apparently because investors liked the gridlock in Washington that a Republican-controlled Senate offered. Now that the Senate is controlled (just) by the Democrats, stocks are rallying apparently because investors like the promise of further U.S fiscal stimulus, and a commitment to multilateralism on the world stage!