With two COVID-19 vaccines approved in the U.S. and more fiscal stimulus about to be deployed, there is a clear bridge (vaccine) to post-COVID normalcy and abutments (stimulus) that should keep the recovery on course.
Market sentiment is looking ahead to the end of the COVID-19 pandemic, probably in the first half of 2021, when an effective vaccine is widely distributed. An end date on the horizon is certainly a good thing for stocks.
As U.S. COVID-19 cases increase, so does the risk that economic recovery decelerates. We think policy makers will do what it takes to sustain the recovery, and therefore continue to prefer U.S. equities over bonds.
Despite our expectations for a dreadful drop in 2Q20 output, we believe a recovery will commence in 3Q20 and lead to a meaningful acceleration beginning in 2021. Accordingly, stocks still look more attractive to us than bonds.
We are still overweight U.S. large caps, believing winners will win until a broad-based economic recovery takes hold. Our preference for investment grade U.S. bonds remains; also, we now see opportunities among high yield bonds.
We consider the coronavirus outbreak a temporary shock, inducing a technical recession but not fundamentally impairing productive capacity. Considering this and an expanded equity risk premium, we see stocks as more attractive than bonds.