Against the backdrop of shifting economic and market conditions, the nature of the post-COVID landscape is beginning to be glimpsed. Change may be in the air, but the importance of maintaining a long-term focus on investing in quality companies with durable competitive advantages remains intact.
The economic recovery gathered momentum in the opening quarter of 2021, albeit at a pace that varied by geography as the pandemic remains far from over. COVID-19 cases appear to be rising again in many places, with new more resilient mutations increasingly prevalent, while the extent of vaccine rollouts vary greatly globally. Nevertheless, the global economy is on pace to expand at a faster rate than we’ve seen for many years. The US, in particular, is in resurgent mode, as recovery is being bolstered by a new massive $1.9 trillion stimulus program. The result is a cyclically-stimulated market.
Ten-year rates have risen sharply along with inflation expectations, although both appear to be well contained for now by historical standards. In terms of equities, this has driven a rotation toward value, cyclicals, and generally lower quality. Many of these companies were hit particularly hard during the pandemic and the progression to recovery mode has led to a rerating. Growth and high-quality stocks, which were viewed as ‘safe havens’ in the midst of last year’s turmoil, have lost some of their luster as the recovery has gained momentum. This has resulted in a market that is less narrowly concentrated, which is a healthy development. Valuations remain on the high side, but this reflects strong earnings growth expectations that are continuing to be revised higher. While this leaves less room for error, these expectations appear rational given the many positive economic tailwinds. Investors are cautious, given the latest COVID wave, but the biggest concern may be an overheating economy that leads to earlier than expected central bank tightening.