The likelihood of a divided US government removes a major potential headwind to the US economy, that is, higher taxes. With multiple Covid-19 vaccines showing promise, the US economy may surprise on the upside in 2021. We estimate that the ten-year yield may reach 1.00%-1.25% by the end of 2021, with foreign demand reigning in potentially higher longer-term rates. We think equities will continue to be more attractive than fixed income because earnings yields through November exceeded investment-grade corporate yields, and the gap between dividend yields and the ten-year Treasury yield was the largest since the 1950s. While a divided government will limit the most aggressive policies of Democrats, including the Green New Deal, the power of Biden’s executive branch to increase regulation should bring meaningful pressure on companies to improve their ESG profiles. We expect continued momentum for ESG investing.
Asset Class Return Forecasts - Q2 2022