T. Rowe Price

The global recovery appears on track, but policymakers may be challenged to restrain inflation without stifling growth. U.S. equity valuations are vulnerable to rising interest rates. Slowing U.S. earnings growth could increase the attractiveness of ex-U.S. equity markets. The risk of central bank missteps could produce volatile bond markets.

The delta variant seems likely to have only delayed rather than derailed the global recovery—perhaps making growth over the coming quarters modestly more robust than it might otherwise have been. How today’s elevated bond and equity valuations will respond to the normalization of monetary policy is an open question, however.

Investors have renewed interest in tax-efficient investment models in search of better after-tax returns. Municipal bonds can be impactful in a tax-efficient portfolio, but equity tax-efficiency can be harder to find. Investors could consider tax-advantaged investment vehicles, dedicated tax-efficient strategies, and active mutual funds with tax-efficient alpha.

The value rally has recently fizzled, and growth stocks have regained ground, narrowing the performance gap considerably. However, despite strong fundamentals, growth stock valuations are extreme relative to value stocks. Our Asset Allocation Committee continues to favor value stocks as potential catalysts could be supportive.

In March and April, our Asset Allocation Committee modestly decreased the allocation to equities, given elevated stock valuations and a moderating economic outlook. In our view, key performance drivers may peak in the near term, which could temper potential equity returns going forward.

Economic recovery from the pandemic appears set to strengthen across regions and countries in the second half of 2021. A key question is whether growth will be strong enough to meet earnings expectations without fueling inflation. Valuations for many equity averages are stretched, but there may be outperformance potential in some non-U.S. markets.

Historically, equities have tended to generate higher medium- and long-term returns than fixed income and cash assets. Our analysis suggests that over the 95 years that ended in December 2020, most investors could have accumulated larger balances by following higher-equity glide paths, even after experiencing large market declines near retirement.

Many investors typically focus on bank loans only when the Federal Reserve is expected to raise interest rates in the short term. While loans have historically performed well under those conditions, we believe the asset class can potentially add value as a strategic allocation in various market environments within the economic and interest rate cycles.

The challenges of the current fixed income environment may not be fully understood by investors. For that reason, we have identified three issues that we believe investors should consider: focusing on the diversification power of bonds, their performance potential, and their liquidity profile for 2021.

The continuing threat posed by the coronavirus, necessitating ongoing social distancing, means it is hard to gauge how long the current economic disruption might last. Consequently, we believe consensus expectations may be overestimating the trajectory for improvement and that a return to a “normalized” environment may take longer than anticipated.

While times like these are challenging for investors, we believe they can also help sharpen conviction in underlying investments. We have not made any wholesale changes. With a longer-term approach to investing, we believe the fear of others will continue to present us with attractive opportunities.

A growing number of companies are facing secular risks that could impair their long-term growth prospects. While this trend poses challenges for many traditional issuers of high yield bonds, it is also creating a new generation of companies in the high yield market that offer attractive opportunities.

T. Rowe Price equity analyst Paulina Amieva talks to management, suppliers, and customers in Mexico City.

T. Rowe Price equity analyst Andrew Davis visits a busy Ohio train yard.

Enhanced yield is still available – a selective and broad approach is key.

Financially fit employees are happier, healthier, and more productive. Watch the video for the full story.