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Monthly Investment Outlook - Reflation and portfolios

Wells Fargo Investment Institute - February 2021

Presenter: Chris Haverland, CFA, Global Asset Allocation Strategist, Wells Fargo Investment Institute


Title graphic: Reflation and portfolios

We believe the economic momentum that began in the second half of 2020 will continue in 2021. Although all may not be back to normal by year-end, we expect the S&P 500 Index to reach record highs driven by the reflation theme.

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.

The Federal Reserve’s accommodative stance is expected to last at least through 2021, which should support risk assets, especially equities. In addition, we believe a Democrat-controlled Congress is likely to boost fiscal spending, a key ingredient for reflation.

Equity classes and sectors that tend to be more sensitive to the economy have often benefited the most from a “reflation trade.” Those include U.S. small-cap and emerging markets equities, and cyclical sectors, such as Financials, Industrials, and Materials.