Russell Investments’ Q4 2021 market outlook: Strategists expect pandemic-recovery trade to shake off growing pains

Team favors equities over bonds, value over growth factor, and non-U.S. over U.S. stocks

SEATTLE, September 28, 2021 —  Russell Investments’ strategists expect the pandemic-recovery trade to resume in Q4 as inflation subsides, COVID-19 infection rates decline, and central bank tapering turns out to not equal tightening. Although the strategists expect the U.S. economy will likely sustain above-trend growth into 2022,  they believe the easiest gains are probably in the rear-view mirror as the recovery phase of the business cycle matures.

“The post-lockdown recovery has transitioned from energetic youthfulness to awkward adolescence,” said Andrew Pease, global head of investment strategy at Russell Investments. “It’s still growing, although at a slower pace, and there are worries about what happens next—particularly around monetary policy and the outlook for inflation.”

Pease sees the inflation spike as transitory, caused by base effects from the fall in the U.S. consumer price index during the lockdown last year and temporary supply bottlenecks. He expects inflation may remain high through the remainder of 2021, but it should decline in early 2022. This means that even though the U.S. Federal Reserve (the Fed) is likely to begin tapering asset purchases before the end of 2021, he sees rate hikes as unlikely before the second half of 2023.

The strategist team is closely watching two indicators for guidance on the Fed’s expected reaction to the inflation spike: five-year/five-year breakeven inflation expectations and the Atlanta Fed’s Wage Growth Tracker. Regarding breakeven inflation, the team sees market expectations at the beginning of Q4 as comfortably below the Fed’s worry point. Regarding the wage growth tracker, the team’s breakdown shows that the recent spike has been mostly driven by wages for low-skilled, young people in the leisure and hospitality industry. This suggests that the surge has been caused by temporary labor supply shortages and that wage pressures should subside as economic activity normalizes.

The other market concern remains the highly contagious COVID-19 delta variant. “With vaccination rates accelerating globally, and emerging economies catching up with developed markets, we believe the broader economic reopening should continue through the rest of 2021,” Pease said. 

Russell Investments’ cycle, value and sentiment investment decision-making process shows a broadly unchanged view from the mid-year analysis. Global equities remain expensive, with the very expensive U.S. market offsetting better value elsewhere. Sentiment is slightly overbought, but not close to dangerous levels of euphoria. The strong cycle delivers a preference for equities over bonds for at least the next 12 months, despite expensive valuations. It also reinforces the team’s preference for the value equity factor over the growth factor and for non-U.S. equities to outperform the U.S. market.  

At the beginning of Q4 2021, the strategist team’s asset-class views are summarized as follows:

  • Prefer non-U.S. equities to U.S. equities. “Stronger economic growth and steeper yields curves after the third-quarter slowdown should favor undervalued cyclical value stocks over expensive technology and growth stocks,” Pease said. “Relative to the U.S., the rest of the world is overweight cyclical value stocks.”
  • Expect encouraging signs for emerging markets (EM) equities, which have been relatively poor performers this year. “The vaccine rollout across EM has accelerated and policy easing in China should soon boost the economic growth outlook,” Pease said. “China’s regulatory crackdown has caused significant underperformance by Chinese technology companies, but this should be less of a headwind going forward now that it is priced in.”
  • View high yield and investment grade credit as expensive on a spread basis but with support from a positive cycle that accommodates corporate profit growth and keeps default rates low. “U.S. dollar-denominated emerging markets debt is close to fair value in spread terms, and we expect it to gain support on U.S. dollar weakness,” Pease said.
  • See government bonds as expensive. “Yields should come under upward pressure as output gaps close and central banks look to taper back asset purchases,” Pease said. “We expect the 10-year U.S. Treasury yield to rise toward 1.75% in coming months.”
  • Regarding real assets: Expect Real Estate Investment Trusts (REITS) and Global Listed Infrastructure should benefit from the pandemic recovery. “Commodities, led by industrial metals and energy, have been the best-performing asset class this year amid strong demand and supply bottlenecks,” Pease said. “The pace of increase should ease as supply issues are resolved, but commodities should retain support from above-trend global demand.”
  • Expect the U.S. dollar will weaken as global growth leadership rotates away from the U.S. and toward Europe and other developed economies. “The main beneficiary is likely to be the euro, which is still undervalued,” Pease said. He also believes British sterling and the economically sensitive “commodity” currencies – the Australian dollar, New Zealand dollar and Canadian dollar – can make further gains, although these currencies are not undervalued from a longer-term perspective.


For more information, please see the team’s 2021 Global Market Outlook – Q4 update.

About Russell Investments

Russell Investments is a leading global investment solutions firm with $331.5 billion in assets under management (as of 6/30/2021) and $2.8 trillion in assets under advisement (as of 12/31/2020) for clients in 32 countries. The firm provides a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including in New York, London, Tokyo, and Shanghai. 

Contact: Steve Claiborne, 206-505-1858,