Rethinking portfolios now that ex-central bankers Janet Yellen and Mario Draghi have their hands on the purse strings.

When Janet Yellen was chair of the Federal Reserve and Mario Draghi was president of the European Central Bank, they repeatedly pointed out the limits of monetary policy, and urged fiscal authorities to do their part to support the economy.

Remarkably, now both former central bankers are in government leadership positions with their hands on the purse strings. In our view that reflects a significant development for investors even beyond the U.S. and Italy: The doves are now in charge and government spending may no longer be on the sidelines.

The Fiscal Impulse

Janet Yellen, now Treasury secretary in President Biden’s new administration, last week told the news networks that the U.S. was still in a deep jobs recession. This would lead to long-term economic scarring without further fiscal stimulus, she added, and should override concerns about inflation.

The Biden stimulus package, worth $1.9 trillion in its current form, looks likely to be passed via the “reconciliation” process. That does not require Republican support, which suggests minor cuts to the package, if any.

As Ugo Lancioni wrote last week, Mario Draghi looks set to become Italy’s new prime minister, leading a national unity government, and his task will be to implement reforms that will enable the country to spend its €200 billion share of the European Union’s coronavirus recovery fund.

In our view, broad, vocal support for Draghi—not only within Italy but from Germany, whose Finance Ministry and Bundesbank hawks made his ECB years so challenging—indicates how far Europe’s consensus has swung in favor of fiscal intervention.

Underlying Strength

Do the data support this dovishness?

In Europe, where the decline in unemployment and recovery in Purchasing Managers’ Indices (PMIs) have stalled, the case appears strong.

In the U.S., as Yellen observes, jobs data looks similarly fragile. After losing more than 200,000 nonfarm jobs in December, less than 50,000 were recouped in January—with the private sector lagging disproportionately. There are still 700,000 to 900,000 initial jobless claims being made each week; in the latest data, 793,000 new claims were made in the first week of February.

But we see underlying strength in forward-looking data. Job openings are climbing. U.S. PMIs are robust, even in services. Housing starts are setting long-term records. And fourth-quarter earnings reports for the S&P 500 are substantially exceeding even recent analysts’ forecasts.

Should the planned fiscal interventions come to pass, they could supercharge a vaccine-driven recovery in economic activity and consumer spending. This could potentially push U.S. GDP growth to more like 6 – 8% than 4 – 5% in 2021, but also create a big bill to pay in years to come. 


We see signs of this in bond markets. The 30-year U.S. Treasury yield edged over the 2% mark last week, steepening the curve, and the 10-year breakeven inflation rate powered through 2.2%.

Our base case remains an orderly normalization of rates this year, with the 10-year yield finishing around 1.5%. But these markets could reprice very quickly on new information, particularly with current yields so low.

In asset allocation, that suggests to us caution on duration in bond markets and on similar interest rate sensitivity in equity markets—large growth stocks could be vulnerable to an upside surprise in growth, inflation and rates.

Cyclical parts of the stock market could be interesting, particularly if they have lagged the recent recovery. That might suggest semiconductors, with their exposure to the capex cycle, at the sector level, and the U.K., German and Japanese markets at the country level. For much the same reasons, we like inflation-sensitive assets such as index-linked bonds and commodities.

Smaller companies are often favored in these early-cycle conditions, but in the U.S., at least, small caps have already rallied substantially. Investors might instead consider an equal-weighted S&P 500 exposure. This is one way to stay in touch should the large-cap equity rally continue, but with a more cyclical and less interest rate-sensitive tilt. Similarly, equity index option strategies could be deployed to maintain equity exposure while also monetizing the current divergence of realized and implied volatility.  

In short, we believe positioning for 2021 looks increasingly to be about maintaining equity exposure into the economic recovery, at a reasonable price, while being mindful of potential volatility.

In our view, it’s most important to bear in mind that volatility, should it come, is likely to be felt most acutely in Treasuries and the large-cap indices that are now dominated by secular growth stocks. With the doves ascendant, for the first time in a long while, markets may now have more potential to be surprised by growth, inflation and rates on the upside than the downside.

In Case You Missed It

  • U.S. Consumer Price Index: +0.3% in January month-over-month and +1.4% year-over-year (core CPI unchanged month-over-month and 1.4% year-over-year)
  • U.S. Initial Jobless Claims: +793,000 for the week ending February 6

What to Watch For

  • Monday, February 15:
    • Japan 4Q 2020 GDP (Preliminary)
  • Tuseday, February 16:
    • Eurozone 4Q 2020 GDP (Second Preliminary)
  • Wednesday, February 17:
    • U.S. Producer Price Index
    • U.S. Retail Sales
    • NAHB Housing Market Index
  • Thursday, February 18:
    • U.S. Housing Starts and Building Permits
    • U.S. Initial Jobless Claims
    • Japan Purchasing Managers’ Index
    • Japan Consumer Price Index
  • Friday, February 19:
    • Eurozone Purchasing Managers’ Index
    • U.S. Existing Home Sales

– Andrew White, Investment Strategy Group