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BlackRock Commentary: The new nominal, accelerated

Jean Boivin, Head of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Scott Thiel, Chief Fixed Income Strategist and Kurt Reiman, Senior Strategist for North America all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

The Democrats’ newly gained majority in U.S. Congress paves the way for greater public spending but the narrow margin limits the scope for higher taxes, in our view. We expect this outcome to speed up “the new nominal”, or our expectations for stronger growth coupled with stable nominal yields, even as a more infectious virus strain threatens to make the path to a full activity restart more bumpy.

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Past performance is no guarantee of future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv, January 2021. Notes: U.S. mega-cap stocks are represented by the S&P 100 Index, and small-cap stocks by the S&P 600 Index. Performance is rebased to 100 on Nov. 6, 2020, the last trading day before major news organizations declared Democratic candidate Joe Biden had won the presidential election, as well as Pfizer and BioNTech announced the preliminary Covid vaccine efficacy data.


The new virus strain has sent hospitalizations spiking in the UK where it was first detected, and is spreading globally, posing serious challenges to efforts to beat back the virus. It could delay the activity restart in the near term and increase the time needed for the economy to return to its pre-virus trend. Yet ultimately we still expect the cumulative economic activity loss from the Covid shock – what matters for markets – to be just a fraction of that seen after the global financial crisis, and believe investors should look through any market volatility triggered by evolving virus dynamics. The rollout of vaccines is off to a slow start, yet we believe once vaccination becomes widespread it will allow a more forceful restart due to the pent-up demand. As part of our overall pro-risk stance, we are overweight U.S. small- and mid-cap stocks as we see them benefitting from the vaccine-led restart. The prospects for more fiscal spending under a united Democratic government could further fuel the ascent of small caps, after they have significantly outperformed mega caps since the U.S. election, as the chart shows.

We expect significant fiscal support relative to a scenario of ongoing Republican control of the Senate. This could accelerate our new nominal theme, pushing inflation higher over time but with the Federal Reserve keeping the rise in U.S. Treasury yields in check. It also reinforces our turbocharged transformations theme, including the tectonic shift toward sustainability. A Democratic majority could pave the way for major green investment. Last week’s market reaction was consistent with this view. Treasury yields breached 1% for the first time since last March, driven by increases in both inflation expectations and real yields. This suggests markets are likely to test the Fed’s resolve to lean against any excessive climb in nominal yields. We expect greater fiscal spending to be largely funded through increased deficits rather than higher taxes, given the Democrats’ slim majority in both chambers of Congress. The policy revolution has brought on greater tolerance for higher debt globally, yet just how long such attitudes could last is key. Modest increases in corporate taxes may be possible, but large-scale changes including raising taxes on high-income earners, appear unlikely, in our view. Democratic control of the Senate will likely lead to smooth confirmation of nominees to head the regulatory agencies that are crucial for policymaking.

The first half of 2021 is likely to be a choppy ride. The pandemic poses serious challenges to public health and the activity restart, while we see more policy support in the U.S. on top of the recent $900 billion fiscal package. We advocate a barbell approach to risk exposures, with selected cyclicals such as U.S. small-caps and emerging market equities on one end and quality assets including U.S. and Asia ex-Japan equities on the other. We also like tech and healthcare. These sectors benefit from structural trends turbocharged by the pandemic and their strong balance sheets and cash flows provide some resilience against volatility. Yet we recognize U.S. tech could face challenges from greater regulation and corporate taxes.

Bottom line: The new slim Democratic majority in Congress boosts our expectations for more public spending without commensurate tax increases. We also expect a strong vaccine-led restart later in the year. All this reinforces our view on growth, rates and inflation, and underpins our preference for inflation-protected securities over nominal U.S. Treasuries. We expect the Fed to lean against any further spike in nominal bond yields. We remain pro-risk overall, favoring overweights in both equities and credit, but see a potentially bumpy path for asset prices broadly, especially as markets have moved a lot since we published our 2021 global outlook in early December.


Market Updates

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Past performance is not a reliable indicator of current or future results. Indexes are unmanaged It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, January 2021. Notes: The two ends of the bars show the lowest and highest returns over the last 12 months, and the dots represent returns compared with 12 months earlier. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot gold, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI USA Index, Bank of America Merrill Lynch Global Broad Corporate Index, MSCI Emerging Markets Index, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global High Yield Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index and spot Brent crude.

Market backdrop

U.S. stock markets rallied to record highs and bond yield rose after the Democrats won two Senate runoff elections in Georgia and gained a slim majority in Congress. President-elect Joe Biden can now push through policy priorities, including regulatory appointments, fiscal stimulus and spending on green initiatives, whereas the Democrats’ narrow majority limits large-scale tax increases. Markets largely shrugged off rioting on Capitol Hill that interrupted Congress’ certification of the presidential election result. The vaccine rollout has been slow as a more infectious strain of the virus is spreading, but we don’t see it materially changing the cumulative economic impact of the virus shock.

Week Ahead

  • January 11th: China total social financing
  • January 15th: University of Michigan Surveys of Consumers; U.S. industrial production

The pace of vaccine rollout amid a virus resurgence will stay in focus in a week of relatively few data releases. The University of Michigan Surveys of Consumers could shed light the health of consumer spending. The U.S. consumer sector, a key pillar of the economy, has shown signs of weakness in recent months. Retail sales declined for two straight months in October and November as Covid hospitalizations and restrictions grew.

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of Jan 11th, 2021 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.

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BlackRock Commentary: Staying dynamic in our strategic views

BlackRock anticipates that the new macroeconomic environment, characterized by increased volatility, will lead to more frequent valuation changes across asset classes. While short-term outcomes may not always be influenced by valuations, they remain significant in the long run.

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