THE DARKEST DAYS OF THE PANDEMIC SEEM TO BE BEHIND US. COVID vaccines are being distributed and administered around the globe, which augurs a material pickup in economic growth later this year. In addition, developed market policymakers, perhaps recalling inadequate responses during past crises, have kept fiscal and monetary support in high gear. Risk assets have responded favorably and the rotation from growth to value has gained momentum.

As we map the road ahead, we think it’s worth contemplating the possibility of a strong but relatively short recovery. The next phase of the rebound, when services widely reopen, employment grows, and overall activity improves, should be positive for risk assets. However, we seem to be moving quickly from early-stage to late-stage asset behavior, judging by the rise in inflation-sensitive assets like cyclicals and commodities. We think rising global demand, higher commodity prices, low inventories, and wage pressures, among other factors, could push up inflation and inflation expectations sooner than the market expects. In addition, we expect more bouts of the market challenging the US Federal Reserve (Fed) by driving real yields higher.

Ultimately though, we think the Fed will stick to its commitment to look past higher inflation prints and keep policy rates pinned at zero. As a result, the runway for cyclical assets to outperform likely extends through..

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