Though volatility is likely to continue, the outlook for equities remains constructive as we progress past the election and get closer to the end of the coronavirus pandemic.

  Key Takeaways:

  • 2020 has been marked by extreme volatility yet, driven by several factors, we
    think that stability can return to markets as we approach the new year.
  • Forces driving growth both before and through the pandemic should remain
    intact, but we also see new, durable investment trends developing.
  • Supported by a positive backdrop, we remain constructive on the outlook for equities as the economy recovers.


2020 has been marked by extreme volatility yet, driven by several factors, we are hopeful that stability can return to markets as we approach the new year. In recent weeks, uncertainty has begun to wane around critical market-driving issues such as a coronavirus vaccine and the U.S. election. Markets have welcomed news of significant progress on a vaccine that, once implemented, will clear a path back to normalcy and enable the full reopening of the economy. The election results have reduced another element of uncertainty, as a divided government looks likely in the new year. This is a setting that markets favor, as it tends to result in more moderate policies.

Long-term drivers of growth remain intact

The pandemic will have lasting impact, as certain segments of the economy, like the travel and hospitality industries, need significant time to heal, and others have likely been permanently altered. However, we expect the primary drivers of growth that have led markets – both before and through the pandemic – to remain intact. These are themes that we have long discussed and invested in related to the widespread digitization of the economy: the rise of e-commerce and e-payments, the ability of businesses to forge direct digital connections with consumers and the expansion of cloud computing and Software as a Service solutions, for example. However, a “new normal” mindset shaped during the pandemic has also spawned investment themes that we believe can endure. For instance, the concept of home has taken on a new meaning over the last year. As people are increasingly working, schooling and enjoying entertainment from home, they have invested in home improvement to make these activities more productive and enjoyable. In health care, the pandemic has also highlighted the need to invest in diagnostics, treatments and vaccinations that can be brought to the market rapidly. We believe the companies that have been advancing research and development in health care innovation will continue to benefit from these trends.

Industry implications of a divided government

There are potential industry implications as we move toward a new government in 2021. The pharmaceutical and defense industries, which have been hampered by the specter of increased regulation and decreased budgeting, respectively, are likely to benefit as divided government takes more extreme policy proposals off the table. We also see bipartisan commonalities on policies that we believe can benefit select industries. For instance, both parties desire to bring manufacturing jobs back to the U.S., and there is bilateral support to shore up the nation’s critical infrastructure. Any policy enacted on these two issues is likely to be a boon for industrial and manufacturing-related industries.

A positive backdrop for equities

Though any new policies will certainly ripple across industries and companies, we believe investors would do well to focus on other long-term factors supporting growth. Our outlook for equities remains constructive, as interest rates are expected to remain historically low for an extended period and dividend and cash flow yields are attractive relative to other asset classes. Despite the pandemic and market crash earlier in the year, consumer wealth is at record levels due to a brisk market recovery and robust housing market. Thus, we expect consumer spending, the primary driver of U.S. economic growth, to accelerate as we get closer to the end of the pandemic. Low rates and support from monetary policies have enabled companies to issue low-cost debt which they are now able to deploy in mergers and acquisitions or internal capital projects that can drive future growth.

Although these factors create a positive backdrop for equities, we expect markets to remain volatile as the economic recovery progresses. As we move into the new year, we think it will be important to remain active and to focus on companies with strong balance sheets, long-term competitive advantages and opportunities to invest in their businesses.