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Market Outlook: Stocks climbing despite higher yields

Stimulus measures help sustain share prices

Last weekend, American households began receiving their USD 1,400 per person "economic impact payments", which account for nearly 25% of President Joe Biden's USD 1.9 trillion American Rescue Plan. One study indicates that up to 75% of the payments will go towards savings or possibly the stock market.

Meanwhile the European Central Bank reaffirmed its accommodative monetary policy by stating that it does not want to see upturns in bond yields that might jeopardise the recovery. The ECB said that asset purchases under its pandemic emergency purchase programme (PEPP) during the next quarter will "be conducted at a significantly higher pace than during the first months of this year."

Aside from positive news related to stimulus measures, financial markets were cheered by a larger-than-expected drop in US initial unemployment benefit claims. Although 10-year Treasury yields have climbed, US share prices measured by the broad S&P 500 index have remained at or near all-time highs.

The S&P 500 bottomed out on March 23, 2020; today it is nearly 80% higher. Meanwhile 10-year Treasury yields are around 1.60% (more than one percentage point above their lows in July 2020). We believe that both share price indices and Treasury yields will be higher at the end of 2021.

Faster pace of COVID-19 vaccinations in the US than in the EU

The United States is benefiting both from a solid economic recovery and a rapid pace of vaccinations against COVID-19. President Biden announced late last week that he expects all adult American to be able to book a vaccination appointment by May 1, with the aim of returning to some kind of normality by Independence Day, July 4.

In contrast, the European Union suffered a new setback when AstraZeneca announced that it will not be able to deliver the vaccine doses it had promised the EU because of recently imposed export bans in the US and India. Germany, France, Italy, Spain and other EU countries have also decided to temporarily pause their administration of the AstraZeneca vaccine. Both the World Health Organisation (WHO) and the European Medicines Agency (EMA) will investigate reports of blood clots occurring in several dozen people who had received the AstraZeneca vaccine but have said that the public health risks of postposing vaccinations may outweigh the risks of such side effects. According to the WHO there is no evidence that AstraZeneca's vaccine caused the reported blood clots.

While the US has now vaccinated nearly 30% of its population, most EU countries are at between 5 and 15%. As for economic recovery, EU countries must try to make the best of the situation. The Danish strategy of opening up the economy as soon as everyone over age 50 plus those in risk categories have received their vaccinations may be a way forward for other EU countries as well.

New Swedish inflation figures below expectations

Sweden's latest inflation figures were in the 1.5% range (below both SEB and Riksbank forecasts). Inflation is expected to climb this spring, then decline and remain below the Riksbank's 2% target. Financial markets are pricing in a slight probability of a key interest rate cut this year (0.045 percentage points) but a full rate hike by mid-2023 and a repo rate of 0.36% at the end of that year. We believe this is much too fast.

Our market view

Recovery will support stock markets

Share prices have mainly climbed this past week, but investors remain worried about higher US Treasury yields. In itself this is not surprising, since last year's sharp stock market recovery provides reason for caution. We are sticking to last week's cautiously optimistic view of stock markets.

In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022. Due to a combination of continued large stimulus measures and an accelerating economy, inflation risks are emerging on the agenda and thus also worries about a continued climb in government bond yields, especially in the US. We expect only limited upturns in yields, but if they turn out to be faster and larger than this, they may have a negative impact on the stock market mood.

In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.

Share valuations today are undoubtedly high from a historical perspective but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.

Continued potential, though a lot has been priced in

Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.

This suggests that the growth picture will have to become much worse, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. However, profit-taking − with downturns of 10 or perhaps 15 per cent − will still be a natural element of this picture. We nonetheless expect positive, single-digit stock market gains this year.