What You Need to Know

Despite extended global challenges in the second quarter due to the novel coronavirus pandemic, US equity markets posted their largest quarterly gain since 1998. Massive government measures to prevent economic calamity are helping, but this bridge to the other side of the virus could give way, so investors should plan for any scenario.

2Q 2020 S&P 500 Index Performance: Biggest Quarterly Gain Since 1998

In US Fiscal Response to the Coronavirus

Revised Global GDP Forecast for 2020

When the COVID-19 pandemic struck, the US launched a massive policy response to slow the virus’s spread, protect people and businesses, and stabilize markets. The Federal Reserve, the US Department of the Treasury and Congress have been joined at the hip—helping to stem job losses, boost consumer spending and bolster market confidence. A market snapback has been accompanied by green shoots of a reopening economy. Projected 2020 global GDP growth is a disappointing –4.7%, but that’s better than were earlier estimates.

There’s a long way to go. COVID-19 cases are up in many regions, record unemployment persists, and political considerations could stall additional fiscal policy support. With the US election cycle heating up, more market volatility is certain, requiring a sharp focus on downside protection. This scenario doesn’t mean it’s time to panic or sit things out. In fact, we see many intermediate-term opportunities that can generate above-average returns across select bonds and stocks without overreaching.

Considering US Treasury yields are extremely low, we think bond investors should broaden their exposure into corporate high-yield, investment-grade and even emerging-market government bonds. High-yield spreads are wide, with select issuers offering strong upside potential. Municipal bonds in certain sectors should benefit from government aid for everything from hospitals to toll roads and airports.

Dispersion in stock returns is at twice the historical average, which we believe gives active stock pickers an edge to find undervalued, high-quality winners. Select international stocks and companies with persistent year-over-year earnings growth are especially attractive now. Small-cap stocks—which have consistently done well during economic recoveries—also offer value opportunities within key industries, like financials and resources.

The battle against COVID-19 still rages, so it’s critical for investors to be discerning and selective. Even after the virus has ebbed, market returns are likely to be moderate—the by-product of slower economic growth, high debt levels, and fewer buybacks and dividends. The overall goal should be to position a portfolio for meaningful upside participation but with some focus on factors and market segments that can provide some insulation from downside.

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.

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