When the COVID-19 pandemic struck, the US launched a massive policy response to slow the virus’s spread, protect people and businesses, and stabilize markets. The Federal Reserve, the US Department of the Treasury and Congress have been joined at the hip—helping to stem job losses, boost consumer spending and bolster market confidence. A market snapback has been accompanied by green shoots of a reopening economy. Projected 2020 global GDP growth is a disappointing –4.7%, but that’s better than were earlier estimates.

There’s a long way to go. COVID-19 cases are up in many regions, record unemployment persists, and political considerations could stall additional fiscal policy support. With the US election cycle heating up, more market volatility is certain, requiring a sharp focus on downside protection. This scenario doesn’t mean it’s time to panic or sit things out. In fact, we see many intermediate-term opportunities that can generate above-average returns across select bonds and stocks without overreaching.

Considering US Treasury yields are extremely low, we think bond investors should broaden their exposure into corporate high-yield, investment-grade and even emerging-market government bonds. High-yield spreads are wide, with select issuers offering strong upside potential.

Dispersion in stock returns is at twice the historical average, which we believe gives active stock pickers an edge to find undervalued, high-quality winners. Select international stocks and companies with persistent year-over-year earnings growth are especially attractive now. Small-cap stocks—which have consistently done well during economic recoveries—also offer value opportunities within key industries, like financials and resources.

The battle against COVID-19 still rages, so it’s critical for investors to be discerning and selective. Even after the virus has ebbed, market returns are likely to be moderate—the by-product of slower economic growth, high debt levels, and fewer buybacks and dividends. The overall goal should be to position a portfolio for meaningful upside participation but with some focus on factors and market segments that can provide some insulation from downside.