What You Need to Know

With the global vaccine rollout, the world is beginning to change its focus from last year’s fear to this year’s future. The first quarter of 2021 saw a new buoyancy in equity markets, especially US small- and large-cap. But the sudden resurgence of reopenings, along with the latest round of massive fiscal stimulus in the US, injected concerns of rising inflation that stymied fixed-income markets—both government bonds and credit sectors. Although a healthier global economy will likely define 2021, many pieces of the puzzle toward progress require investors’ attention. Among them: the uneven pace of economic reopenings around the world; the different levels of fiscal and monetary support; debt, demographics and deglobalization; and COVID-19 vaccine rollouts versus virus mutations.

US Unemployment Rate,
Still Above Pre-COVID 3.5%

S&P 500 Return:

2021 Global GDP Forecast
Revised up from 4.8%

With COVID-19 fading as a cyclical driver, global output is likely to rebound strongly. Consequently, we have revised our expectations for global growth from 4.8% to 5.9% in 2021—roughly twice the pre-pandemic norm. Coupled with the new US administration’s sizable fiscal stimulus, we have also lifted our expectations for US growth in 2021 from 4.9% to 6.5%.

Vaccine rollout and fiscal stimulus will help set the pace of the global recovery. The US is well placed on both; Europe less so. China has already made a full recovery, with stability now the watchword.

We think the world is on the cusp of a new, higher, inflation regime. But large output gaps and anchored inflation expectations are important hurdles to a sustained near-term increase—notwithstanding a temporary spike in coming months.

Monetary policy rates in developed markets should be on hold until at least the end of 2022. But bond yields are now the battleground. We expect central banks to push back against a further rise, but that won’t prevent markets from testing their resolve. We believe investors should expect more volatility.

Equities are experiencing a pro-cyclical rotation to value, following a long period of growth outperformance. For the past two years at least, P/Es dominated as the driver for S&P 500 returns. But since the start of 2021, earnings have taken the lead. The potential for a rising-rate and inflationary environment should benefit risk assets, like stocks. During such periods over the past 50 years, the S&P 500 has generated an annualized average of 16% returns. But with so many unresolved pieces of the economic puzzle, we believe investors should be selective, focusing on companies with high and stable profits, positive EPS revisions and strong free cash flow. Quality is a durable and universal characteristic, so it can be rewarding to look beyond style and US stocks. In fact, over the past decade, among the top 50 performing stocks around the world, three-fourths were non-US.

Concerning bond yields, the Fed has been surprisingly relaxed about rising yields. But the Fed may be approaching the limits of its tolerance, especially if equities come under pressure. European and Japanese yields, however, are anchored. As the US yield curve steepens, credit sectors should perform well. High-yield spreads are tight and may remain so for some time, but tight spreads (below 400 basis points) have been more typical over the past 25 years than wider spreads. High quality and shorter duration high yield may likely offer better relative value and downside protection. Still, we see a blended credit portfolio—including emerging markets and securitized credit—offering a better income-to-risk profile than just US high yield. For municipal bond investors, the first quarter brought strong inflows on the back of massive stimulus aid to cities and states. Muni credit in particular offers investors attractive levels of income and benefits from the stimulus, and we continue to find that a credit barbell strategy appears favorable over a portfolio of AA Intermediate munis.

COVID-19 remains a key risk if mutations multiply and override current vaccine potencies. Another concern is the potential for central banks’ failure to control the reflation narrative, making the rise in yields disruptive. Investors need to keep a close watch on the historical warning signs of inflation: rapid demand growth when supply is impaired; explosive money-supply growth; and fiscal stimulus.

Despite the many factors that could trigger disruptive volatility, the improving economic trajectory offers opportunities for investors who are discerning and selective.

Past performance, historical and current analyses, and expectations do not guarantee future results. There can be no assurance that any investment objectives will be achieved. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Investment Products Offered: Are Not FDIC Insured | May Lose Value | Are Not Bank Guaranteed

AllianceBernstein Investments, Inc. (ABI) is the distributor of the AllianceBernstein family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the manager of the funds.

AllianceBernstein® and the AB logo are registered trademarks and service marks used by permission of the owner, AllianceBernstein L.P.

© 2021 AllianceBernstein L.P.

Clients Only

The content you have selected is for clients only. If you are a client, please continue to log in. You will then be able to open and read this content.