Equity Investing for a New Era: The Return of Alpha

The economy and markets have emerged from the pandemic fundamentally changed. For equity investors, we believe this means a different opportunity set than the one that prevailed over the past decade and a half ― and one that favors alpha (excess return) over beta (market return).

Key takeaways

  • The era of easy money is ended. The post-pandemic era is setting up to be more volatile with greater differentiation across individual stocks.
  • Beta, or market return, is sufficient when a rising tide lifts all boats. In the more traditional investing landscape now forming, we see alpha at the center.
  • A more discerning market that prices stocks on their underlying fundamentals is an opportunity for skilled stock pickers to outperform.

The pandemic period, inclusive of the crisis response and aftermath, roused an entirely new set of circumstances upon which the economy and markets are establishing their footing. For equity investors, we believe this regime change means a different opportunity set than the one that prevailed over the past decade and a half ― and one that favors alpha (excess return) over beta (market return).

New Era for Alpha Pullquote 1

The end ― and beginning ― of an era

Capturing the essence of the new market regime requires context and reflection on the dynamics that existed prior to the current moment. The years following the 2008 Global Financial Crisis (GFC) were marked by 1) fragility and 2) unprecedented accommodation. Households and businesses were recovering from a deep recession and fallout from financial and corporate failures. For its part, the Federal Reserve (Fed) cut rates to near zero and implemented quantitative easing for the first time to stimulate the economy and help consumers and businesses heal, propping up markets in the process.

Fast forward to 2020 and the COVID-19 crisis. It was a time marked by a global economic shutdown and restart and an unprecedented combination of monetary and fiscal support that was far greater than that seen during the GFC even as the earlier crisis imposed a more potent shock to GDP. Consumer pockets were padded with stimulus money and demand for goods was great ― but supply was limited, having been disrupted by pandemic-related closures.

What followed was supply-side inflation ignited by the crisis, accommodated by fiscal and monetary stimulus, which was further exacerbated by war in Ukraine. Central banks vigilantly raised rates to combat soaring prices. While inflation is beginning to moderate, sticky elements such as wages are proving harder to bring down, setting the stage for higher inflation and interest rates for longer, just as stock valuations also are higher.