Global daily doses of the vaccine have ramped up quickly since the start of year contributing positively to the global growth outlook. The start of the year had about 1 million per day being distributed, but that has now climbed to over 15 million¹ per day. Federal and provincial governments are working to have everyone who wants a vaccine able to receive it by the end of September. Early data from those countries that are ahead in vaccination progress point to a flattened curve, which gives optimism to a full reopening by year end. Before we get ahead of ourselves though, it is worth keeping an eye on the variant strains that spread faster. The cases have increased enough in Europe to bring about a third round of lockdowns and are ticking up again in Canada as well.

In anticipation of the reopening, central banks expect 2021 to show a pickup in headline inflation  due to factors such as higher energy prices and supply constraints. The consensus is that this will be transitory, and core inflation excluding volatile items such as energy may remain below target for 2021. By and large, central banks don’t see core inflation hitting consistently at or above target until 2023.

Looking at employment, US and Canadian unemployment figures are still on the mend, recovering jobs that were lost as a result of the shutdowns. The Statistics Canada Labour Force Survey, indicates just under 3.0 million jobs were lost from February 2020 to April 2020². To the end of February this year, 2.4 million of those have been recovered, or about 80%. Jobs recovered were broad based across all sectors for the most part, but accommodations and food services that were hit the most have only recovered roughly half the jobs that were initially lost.

Bond yields for the year moved up quickly in a move not seen since the “taper tantrum” in 2013. The yield on the 10 year Canada bond has risen from 0.43% at the start of August to 1.5% with the bulk of that move happening this year. There is a lingering concern that equity prices will be impacted as bond yields increasingly look more attractive. By many valuation measures, equities are looking expensive in historical context; but so are bonds and cash. The price paid for a company's future earnings should always be anchored to an investors opportunity set for other potential sources of return, bonds being the primary alternative. It is true that bonds look more attractive today than they did three months ago but the forward earnings yield of equities at roughly 4.8% for global developed stocks³ still well outpaces a 10 year Canadian government bond yield at 1.5%. On a relative basis in terms of expected earnings yields, long term returns still look the most attractive with equities, then bonds, then cash respectively. In fact, many fixed income options continue to offer a negative expected real return for investors when taking 2% inflation into account.

Moving to commodities—lumber, base metals, oil—all are seeing significant price increases when compared to 2020. The US Census Bureau tracks retail spending on building material and garden supplies which has increased 20% from the end of 2019. Sitting at home, coupled with record low borrowing rates and less spending, has home improvement projects at the top of mind for many. When everyone wants the same thing at the same time, no surprise, prices increase. One item oddly absent from the recent commodity rally is gold which has retraced more than 15% since last summer. Typically inflation expectations and a weakening US dollar are both assumed to impact gold prices positively, but last year was anything but typical.

There is a lot of optimism surrounding the reopening which has contributed to global stocks recovering at a record pace. With that however, there has been no shortage of attention grabbing localized bubbles. It is important to remember that these do not represent the broader market and none are needed to achieve long term goals for a portfolio. Borrowing a quote from Mark Twain, “there are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.” As we always have, we take a longer term view knowing that these short-term headlines fade and are most often irrelevant. A well diversified portfolio focused on profit-producing companies and value oriented bonds has served us well including last year. We remain steadfast in that approach.