SSGA-SPDR: Protecting Growth in the New Economy

November 3, 2021

Global economies are well on their way to returning to pre-pandemic levels of production and consumption. While the supply chains of both goods and labour have remained challenged, the return of consumer confidence brought on by ending lockdowns and returning mobility have helped spur demand. While the dislocation between supply and demand has continued to fuel inflation concerns, central banks globally are signalling a medium-term normalisation of interest rate policy.

In its Q3 market outlook, SSGA-SPDR highlighted a continued opportunity to play the recovery trade as economic activity was picking up. Dividend stocks are expected to follow the rally seen in value stocks during the first half of 2021. While SSGA-SPDR may have been early to this trade, the longer-term market outlook points toward increased inflation expectations and higher interest rates coming from the economic recovery. Despite the transparency of central banks, investors would be prudent to expect further market volatility on the road to recovery.

Investors who have benefitted from a decade of growth-led asset price expansion, fuelled by easy money policy, could see higher interest rates on the horizon. As such, it may be time to seek ways to protect portfolio growth in the new (post pandemic) economy. SSGA-SPDR believes this means looking to the diversification benefits of dividends in US and global equities, while emphasising the value play in Europe.

In the years since the US Federal Reserve (“Fed”) returned to its dovish, easy-money, low interest rate environment, US investors have seen growth stocks benefit. This has in part led to the concentration of the S&P 500® index to levels not seen since the 1970s. While this has helped investors who are long the popular US equity benchmark, as we enter Q4 2021 - when the Fed is expected to announce plans to dial back the asset purchases so critical to keeping yields low - investors are evaluating their continued appetite to remain long the “winners” of easy money. The last time the Fed undertook the exercise of raising interest rates (December 2015), it sparked a period of outperformance in dividend stocks.