It’s no surprise that several sectors within commercial real estate are facing acute stress from the coronavirus pandemic. Though delinquency trends for these two strained sectors remain high — as seen below — they began to moderate in the fourth quarter.
Although not a given in 2021, any normalization of trade policies in the coming quarters likely would be positive for S&P 500 Index earnings, potentially adding to the expected cyclical rebound. Reflation – Policymakers around the world took aggressive actions in 2020 to combat the pandemic-induced recession. These fiscal and monetary policies provided unprecedented liquidity to the global economy that is leading to a weaker U. S. dollar, a steeper yield curve, and the reflation of asset prices. We look for the Federal Reserve’s accommodative stance to last at least through 2021, which should support risk assets — especially equities.
In addition, a Democratic-controlled Congress is likely to boost fiscal spending, a key ingredient for reflation. Tactical means that we always hold a certain amount in various securities, but will vary the percentage. For example, the allocation to stocks may never go to zero but may fluctuate between 30% and 60%. Moderately Aggressive seeks long-term growth of capital with current income as a secondary consideration. Investors should be willing to accept a moderate degree of principal volatility. The portfolio will be approximately 80% equities, 20% fixed income securities. Buying flashy high-growth stocks may seem like a great way to build wealth, but I’d caution you to hold off on these until you’re a little more experienced.
In fact, recent progress by Mall of America owners to restructure its $1. 4 billion mortgage and cure its delinquency could even be a precursor to more retail-sector loan modifications in 2021. Importantly, other sectors such as multi-family, industrial, and even office have remained in a healthier position throughout the year. We expect Relative Value hedge funds to be active in the commercial mortgage-backed market this year, seeking to isolate winners from losers and identify post-pandemic trends. Over the same time period — not surprisingly — most commodity prices have been rising. Historically it has been common for commodity prices to run opposite the USD.
Resumption of global trade – We expect the Biden administration to have a somewhat less aggressive approach to trade policy and the use of tariffs. In our view, relaxing some of the restraints from the past few years could benefit corporations as well as investors. Working with our trading partners to develop mutually beneficial agreements could result in a more stable, investor-friendly environment for multinationals. This may provide a tailwind to U. S. large-cap equities with 40% of S&P 500 Index revenues coming from foreign countries. At the sector level, Materials, Information Technology, and Consumer Staples have the highest foreign revenue exposure.
The reason is that many global commodities are priced in USD. As the USD weakens, the currencies of other markets often strengthen, which gives these countries extra buying power. This extra buying power can influence commodity demand and commodity prices.