The roller-coaster ride of 2020 still has a few twists and turns to navigate, including the upcoming US elections. But the massive policy response to the COVID-19 pandemic brought a quick, though incomplete, recovery that helped business re-openings, improved coronavirus trends, and shored up employment and consumer spending.
As we enter the fourth quarter, the US economy—and the world, in general—is still far from normal, and we continue to expect a long, slow pace to the recovery. While our expectations for 2020 annualized growth has improved, we’ve pared back our 4Q 2020 and full-year 2021 growth estimates.
US relief policies from the first half of 2020 have mostly run their course, and further action from Washington has stalled. Regional and local virus outbreaks have brought a rise in cases, and employment gains have slowed from the strong second quarter. The uncertainties surrounding the imminent US presidential election and the delay in further fiscal stimulus pose real risks to the economy and the markets.
More volatility is certain, making risk management essential. But this scenario doesn’t mean it’s time to panic or sit things out. In fact, we see many intermediate-term opportunities that have the potential to generate above-average returns across select bonds and stocks without overreaching.
Global equity markets advanced in the third quarter, with market moves dominated—both up and down—by a very small group of giant US stocks. Diversification beyond big tech is essential for managing risk and maintaining a favorable mix that both participates and defends. Active investors can find attractive opportunities by focusing on quality—companies with high or stable profits, strong free cash flow and strong balance sheets. And quality companies can be found in both value and growth styles, as well as among select smaller cap and international stocks.
Fixed income investors may wonder if bonds can continue to play defense and provide income when yields are at historic lows. By strategically pairing interest-rate risk with diverse sources of credit risk, we believe investors can improve the risk, return and income profiles of their portfolios. Muni bonds in certain sectors—from hospitals to toll roads and airports—should benefit from government aid.
Volatility and the virus will be with us for some time, so it’s critical for investors to be discerning and selective. Regardless of the outcome for the US elections, economic recovery will likely be slower than we want. But active investors can position their portfolios to both participate and defend.