The year 2020 began with significant market volatility, as the rise in COVID-19 cases led to a global pandemic and economic gridlock. However, central banks and governments responded quickly with fiscal and monetary support, allowing investment markets to regain solid footing.
Once the initial shock wore off and economic stimulus began to flow through to the economy, markets staged a remarkable recovery through the remainder of the year. As we look out on the horizon to 2021, there are a few primary considerations. First, we believe we have begun a new long-term economic expansion. Economic activity, corporate earnings and global labor markets have begun to repair themselves. Second, investment markets have rebounded quickly, reflecting both the economic repair as well as the stimulus the economy has received. This has left some questioning if markets have disconnected from fundamentals. Given that North American equity markets have reached new record highs, this is a reasonable question.
These lofty valuations mean that it will be up to corporate earnings growth to support equity market prices going forward. Outside of earnings specifically, we anticipate several tailwinds that could also support markets. Namely, a more stable U.S. government, the continued distribution of COVID-19 vaccinations, the gradual reopening of the economy and low interest rates. Overall, although valuations pose a risk to investment returns in 2021, the balance of risks and notable tailwinds leave us constructive and optimistic that we are embarking on a new economic expansion that will reward investors over the medium term.