Recovery on Solid Footing: Tactical Trading Decisions for February 2021
Each month, the State Street Global Advisors Investment Solutions Group (ISG) meets to debate and ultimately determine a Tactical Asset Allocation (TAA) that can be used to help guide near-term investment decisions for client portfolios. By focusing on asset allocation, the ISG team seeks to exploit macro inefficiencies in the market, providing State Street clients with a tool that not only generates alpha, but also generates alpha that is distinct (i.e., uncorrelated) from stock picking and other traditional types of active management. Here we report on the team’s most recent TAA discussion.
The macroeconomic picture remains attractive for growth assets despite some near-term headwinds. Weaker labor data, a drop in some mobility trends, and a slight softening of global PMIs suggest economic growth momentum may have slowed to start the year. However, a myriad of factors suggest the recovery is on solid footing and the current reflation trade has further room to run.
COVID cases, both new infections and hospitalizations, have been improving; despite some hiccups in vaccine rollout, countries are making good progress administering treatments and containing the virus while also loosening mobility restrictions. The global economy is showing resilience as evidenced by supportive PMIs, which have softened a bit but are generally improving – signaling healthy levels of activity, especially in the US. Another round of stimulus is expected in the US, and all indications point to a large and more targeted package that should sustain consumer demand. Corporate profits continue to rebound as measured by the S&P 500, with about 81% of reporting companies beating expectations – a projected growth rate of +1.7% would be the first positive quarterly year-over-year growth since 4Q 2019. This improvement, coupled with ultra-low rates, opens the door for increased dividends and buybacks, which might represent an additional tailwind for equities. Lastly, the Fed has re-committed to staying accommodative, quelling any concerns about the possibility of a taper tantrum similar to 2013.
Overall, we continue to deploy our risk budget toward equities and broad commodities, while tilting our fixed income portfolio toward credit, both investment grade and high yield. Core bonds and REITs continue to look unattractive and remain our largest underweights. See Figure 1.