View the pdf version here. 


U.S. Equities: Major U.S. equity market indices continue to reach all-time highs as well as record levels of overvaluation by our measure. However, even at elevated valuations, monetary and fiscal stimulus remains supportive. In addition, high-yield credit spreads remain narrow. A steepening global yield curve is also a positive development signaling higher growth prospects. U.S. equities also continue to benefit, at least in the short-term, from positive price momentum and favorable investor behavior which could be described as market euphoria. The extreme level of overvaluation of the U.S. equity markets continues to highlight their potential downside risk.

Japanese equities remain the most attractive equity asset class in our model research. More compelling valuations, a continued narrowing of high-yield credit spreads, a steepening yield curve and sustained monetary stimulus from the Bank of Japan all contribute favorably to this outlook. Japan has dealt with the coronavirus pandemic better than many other countries, and because of its ex-port-oriented economy is well-positioned to benefit from a rebound in global economic activity. The potential for continuing positive investor psychology could further enhance the outlook for Japanese equities as projected 2021 earnings for the companies in the Japan MSCI index are expected to increase dramatically throughout the remainder of 2021.

European Equities: European companies should continue to benefit from the sustained and extraordinary monetary and fiscal stimulus required to support the region because of a slower recovery from the coronavirus pandemic and inconsistent progress on vaccinations. Also, the recent strength of the U.S. dollar relative to the Euro could be positive for European equities since a material percentage of companies based in Europe export their products worldwide. Lower local exchange rates can help exporters either expand market share and / or profit margins due to the price advantages a lower exchange rate provides.

Emerging Market Equities: The positive impact of a steepening U.S. yield curve is offset by rising yields on longer-term U.S. Treasuries and a commensurate strengthening of the U.S. dollar, nega-tively impacting the attractiveness of EM equities. However, emerging market countries and their equity markets should continue to benefit from any additional fiscal stimulus from the U.S. govern-ment given the degree to which the U.S. imports from emerging market countries.

Fixed Income

In the first quarter of 2021, interest rates on longer-term U.S. Treasuries increased dramatically. Even at these higher yields, U.S. Treasuries represent an unattractive risk-return trade-off as they continue to yield less than the market’s expected inflation rate across nearly all maturities. Should interest rates continue to move higher, bond market investors would also face the prospect of fur-ther capital depreciation.

Caused in part by investors searching for yield, expectations for economic recovery and the Fed’s continued tacit support of the credit markets (corporate bonds), credit spreads - the difference be-tween high-yield and AAA-grade bond yields – continue to narrow. Short-term risks to credit remain as any accident in the financial markets could cause credit spreads to widen abruptly.

Real Assets

Although gold has struggled thus far in 2021, it continues to be supported by negative real (nominal rates minus inflation expectations) interest rates. Gold is an asset class than can serve as a critical portfolio hedge against the prospects of future central bank money printing and financial repression over the longer term. Gold could also benefit from continued fiscal stimulus from the Biden admin-istration which could raise the prospects of future inflation, especially if the Fed also acts to further repress long-term bond yields. However, rising real long-term interest rates are currently acting as a headwind for gold in the shorter to intermediate term, and sustained downward pressure on the price of gold could encourage further selling and negatively impact the model outlook.

Commodities remain attractive due to the longstanding relative undervaluation of real assets and the prospect of a strong global economic recovery in the second half of 2021. Other factors pos-itively impacting real assets include; appreciation of the Chinese yuan, narrow high-yield credit spreads, a steepening of U.S. and global yield curves and positive price momentum. These posi-tives are somewhat offset by the increase in the value of the U.S. dollar thus far in 2021.