Better Than Expected Earning Recovery Drives Outperformance

Since the onset of the Coronavirus and subsequent economic and capital market dislocations, we have maintained a positive view on equities, negative headlines notwithstanding. We have added prudently to holdings in companies not only expected to weather the storm but well positioned to emerge stronger. Consequently, our portfolios have enjoyed a substantial rebound over the past six months. Broad-based equity outperformance has left valuations at the upper end of historical ranges but stocks remain extraordinarily cheap relative to fixed income alternatives with implied equity risk premia nearly 200 basis points over historical averages.

A global recovery is clearly underway, particularly in China, and a broadening cross-section of the U.S. economy is exhibiting positive growth. Employment is improving and the housing market is benefitting from low mortgage rates and better affordability. Corporate earnings have beat expectations.

We expect the economic recovery and positive market trajectory to continue, subject to short-term interruptions in momentum driven by speculation. Monetary policy is expected to remain constructive with central banks around the globe coordinating infusions of liquidity to ensure more robust economic activity. Fiscal policy measures promise to fuel job creation. At the same time, therapeutics and vaccines are being developed to arrest the spread of Covid-19 and improve patient outcomes.

Our analysis suggests that a vaccine is likely to be in broad distribution by mid-2021 at the latest. While uncertainty surrounding the election and flare-ups in virus caseloads may dominate market action near-term, we remain confident that the next 12-18 months will see a return to sustained growth and a continuation of the bull market.