Well, that was certainly different: After a year in 2017 when markets did nothing but go up in a smooth manner, we were greeted in 2018 with a bit of a rude awakening. We saw markets sell off and volatility return, and indeed the VIX spiked quite sharply during the course of the quarter. Interest rates and the fear of inflation were on everybody’s mind, and as the quarter progressed, we saw both the S&P and rates roll over a little bit.
This is against a backdrop, however, of economic growth around the world that’s pretty strong. PMIs are still well into expansionary territory. And there are some signs of cracking there, we need to be a little bit careful. But generally the economic outlook is pretty good. So the central bankers and the fed are faced with the task this year of raising rates to start to normalize that picture, and we expect rates to go up three times during the course of the year.
The market however, has not quite caught up to this, and we think there might be a little bit of volatility on the way as they start to adjust to that. The real conundrum they and other central bankers face, however, is to keep us in the territory of expansionary growth, without too much inflation, and not tip us over into a range where inflation starts to spark up and they’re forced to act more aggressively, and start to bring rates up more quickly.
The equity markets were a great place to be over the last few years with extremely attractive returns. However, most of this came on the back of PE expansion and margin expansion. Going forward, we expect we’re going to need more in the revenue growth space in order to drive returns going forward. And you have to be selective in looking for that. Actually, if you just look at the S&P 500, only about a third of companies are able to grow at 10% or more, and you need to be selective picking those companies and not just blanket buying the index.
Also, within sectors you need to be thoughtful. Conditions are improving for active stock pickers. Dispersion is coming up. Correlations are coming down. But you’ve got to go out there and find those parts of the market that are most attractive. The defensive areas like utilities and REITs, even after recent underperformance remain pretty expensive, areas like consumer discretionary more attractive. And even in an area like tech, which on average is pretty expensive, there are pockets that are quite attractive that our portfolio managers are finding.
In the fixed income markets, rising rates is the order of the day. But we don’t need to be worried about this too much. The chances of a very sharp rise in rates are quite low historically. And even if rates go up in a normal manner, that’s general pretty good for bond markets as well.
We do see an initial sell-off in the first six months, but over time, that actually gets reflected in good performance. And in the credit markets it’s even better because those higher rates are typically associated with better economic conditions. Within credit, we’re finding opportunities for the first time in a while in energy, where a combination of higher oil prices and better balance sheets are improving the credit conditions there. And also in European financials, where a lot of hard work to reduce leverage on the balance sheets and improve those core tier one ratios is creating some attractive opportunities for our bond portfolio managers.
Around the world outside the developed markets, we do see good opportunity in Latin America in select economies that are showing signs of fundamental improvement, and in Asia you need to be a little bit careful around some markets where the rates are not really high enough to compensate you for some of the risk that’s out there.
So in aggregate, our advice remains fairly stable here: You want to be balanced, have those assets that are in your portfolio to grow your wealth over time. But balance them off against those that will protect you in the inevitable downturns that will come along the way. Be global in your outlook to find the best opportunities and be selective. Look for those companies and credits that give you the best risk adjusted return going forward.
Thanks very much, and we look forward to speaking with you again next quarter.
Display: Q1 2018 Returns Recap: Goldilocks Challenged?
As of 31 March 2018. Past performance does not guarantee future results.
Global high yield, global corporates, and Japan and euro-area government bonds in hedged USD terms. All other non-US returns in unhedged USD terms. Emerging-market debt returns are for dollar-denominated bonds as represented by the J.P. Morgan Emerging Markets Bond Index Global. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AllianceBernstein (AB) portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio. Source: Bloomberg Barclays, FactSet, FTSE, J.P. Morgan, Morningstar, MSCI, Standard & Poor’s (S&P) Dow Jones and AB
Displays (2): When Markets Adjust to the Fed’s Way of Thinking
As of 31 March 2018. Current analysis does not guarantee future results. Source: Bloomberg, Chicago Board Options Exchange, S&P and AB
Display: Manufacturing PMIs
As of 31 March 2018. Historical analysis and current forecasts do not guarantee future results. DM: developed markets. EM: emerging markets. Source: Haver Analytics, IHS Markit and AB
Display: Federal Funds Rate Expectations
As of 31 March 2018. Historical analysis and current forecasts do not guarantee future results. Expectations for federal funds rate are for December 2018 and December 2019. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specific calendar year or over the longer run. Long-run rates are 10-year yields unless otherwise noted. FOMC: Federal Open Market Committee; market expectations are the federal funds rate priced into the Fed futures market as of 21 March 2018 FOMC meeting date. PCE: personal consumption expenditures. Source: Bloomberg, US Federal Reserve and AB
Display: Macroeconomic Cycle
As of 31 March 2018. Historical analysis does not guarantee future results. Source: AB
Display: Rising Profit Margins
As of 31 December 2017. Current analysis does not guarantee future results. Source: Bureau of Economic Analysis, FactSet, S&P, Wall Street Journal and AB
Display: More than Half of the Index Has Single-Digit Revenue Growth
As of 31 December 2017. Historical analysis does not guarantee future results. High-profitability companies are the 20% of stocks in the S&P 500 Index with the highest return on assets. Calendar-year-end earnings per share growth indexed to 1 at January 2011. Forecast sales per share based on Bloomberg reported consensus. Calendar-year total return indexed to 1 at January 2011
*Based on 471 of 505 companies reporting earnings for the fourth quarter of 2017. Source: S&P and AB
Display: Dispersions Are Rising, Especially Above Post-2010 Average
As of 31 December 2017. Past performance, historical analysis and current forecasts do not guarantee future results. Not all sectors perform the same. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio. Three-month trailing average historical monthly return dispersion; MSCI World Index Universe (1990–2017). Source: S&P and AB
Display: I/B/E/S Five-Year Growth Forecast
As of 31 March 2018. Past performance and historical analysis do not guarantee future results. Excludes energy. Source: Thomson Reuters I/B/E/S and AB
Displays (2): Big Spikes in Rates Are Rare...and They Don’t Have to Be Detrimental to Fixed income
As of 31 March 2018. Past performance does not guarantee future results. Source: Bloomberg Barclays and AB
Displays (2): Outlook Remains Constructive for Higher-Beta Energy Names; European Financials Benefit from Improving Fundamentals Backdrop
First display as of 31 March 2018; second display through 30 September 2017 (except for yield pickup).
Historical analysis does not guarantee future results. Core Tier 1 ratios provided by Morgan Stanley European credit strategy research on western European banks. AB bear- and base-case 31 December 2018 forecasts for energy issuers’ net leverage ratios. Annualized hedging benefit uses one-month currency forwards. Source: Bloomberg Barclays, Morgan Stanley and AB
Display: Globalize Credit for Maximum Access to Opportunities
As of 31 March 2018. Current analysis does not guarantee future results. EEMEA: Eastern Europe, the Middle East and Africa. Source: AB
MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices, any securities or financial products. This report is not approved, reviewed or produced by MSCI.
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 AllianceBernstein L.P. or its affiliates.
