The U.S. economy continues to bounce back from the worst of the pandemic. Growth is picking up, job gains are set to accelerate in the months ahead, and the pandemic appears to be in its late innings. We expect a full-blown economic boom over the next 12 to 24 months as the world reopens. Year-to-date into early May, our equity strategy is up nearly 35%.

The government and private sector response to the pandemic has been excellent. Congress has been bold, quickly passing trillions is fiscal stimulus that has served as a critical backstop. The Federal Reserve lowered rates and flooded credit markets and the economy with ample liquidity. And the private sector, with some government help, developed several life-saving vaccines and delivered 100s of millions of them in record time.

Accordingly, global stock markets continue to rally. Signs of excess investor exuberance are popping up, but we continue to expect big things for our portfolio in the years ahead.

We’ve built positions in companies with durable franchises that remain priced for outsized long-term returns. We’re early in this economic cycle and we remain primed to benefit from the reopening of the world economy. Our companies have secular growth prospects, are profitable with margin expansion opportunities, and have high and growing returns on capital.

Broadly speaking, here is our current portfolio setup:

Our banks are the best capitalized they’ve been in decades and have large and growing excess capital to return to us through higher dividends and share repurchases. They are well-primed to benefit from significant loan growth starting later in 2021 and continuing for several years. And interest rates are likely to normalize in the years ahead, and therefore better bank net interest margins are on the horizon. Put it all together and our bank holdings are an underappreciated–by other investors–secular growth opportunity that could run a decade.

Production of oil & gas has been drastically cut over the last few years, a trend that accelerated during the pandemic. Oil field service companies cut capacity upwards of 30% plus, most of which was permanent reductions that can’t easily come back online at the first sign of increased demand. As such, if demand for energy surges later this year as expected, there is a very real risk (opportunity for us) for a supply/demand mismatch that will drive up energy prices and lead to renewed investment in oil production. We own the service companies, which would be direct beneficiaries and, when combined with tightened industry capacity, much better pricing power going forward. Importantly, service companies have rightly shifted from a growth orientation and instead are now focusing on returns on capital, free cash flow, and sustainable margin expansion. This transformation of management focus is historic for industry dynamics and long-term valuations because there is the potential for a much less cyclical industry.

We’re also heavily invested in industrial companies. Manufacturing is already roaring back and our companies have exposure to the long-term trends of electrification, 5G broadband, building upgrades, investments in ‘green’ energy, and the trend to bring more manufacturing stateside. An infrastructure package, which seems highly probable under this U.S. administration, would further amplify our companies’ opportunity set.

It should be obvious that we’re extremely bullish on our companies’ long-term prospects and therefore our portfolio of individual common stocks. Though, we do expect heightened volatility in the months and year ahead.

There will of course be economic setbacks, concerns of high inflation or of stimulus being withdrawn too soon, and numerous other unforeseen investor fears. The stock market has been on a tear recently, and there are a lot of signs of reckless speculation. While an abundance of investor exuberance and froth exists in this stock market, our companies still appear significantly undervalued and trade with below-average valuation multiples. As such, we continue to expect our portfolio to deliver double-digit annual returns in the years ahead, though broad market indexes are likely to have relatively muted returns.

Recently, there has been a lot of talk of higher taxes, for both corporate and personal rates. With a thin margin in the House, Democrats are likely going to have to dial back their wants. Corporate taxes may well rise to 25% from 21%, and some loopholes are likely to be closed. This will crimp corporate profits, but we’ve already built the impact of higher corporate tax rates into our companies’ models. For us at least, it’s priced in.

As far as personal taxes go, there will likely be compromise there as well. On the bright side, our investment approach is extremely tax-friendly, as we tend to own businesses for years. We have some positions that we’ve owned for over a decade, and that’s likely to be the case with newer positions in the years ahead. And that length of holding period can outlast an unkind tax regime.

It is worth noting that the tax-friendly nature of our strategy is a favorable byproduct and not the chief aim. Our long-term orientation (which drives the tax efficiency) exists to build core advantages into our approach: most investors are focused on the short-term, which allows us to benefit from long-term thinking (this is called time horizon arbitrage), also, the longer that we own a company, the wider and deeper our knowledge becomes, which leads to even stronger behavioral and analytical edges.

It should be an interesting and fruitful year!