Another day, another record rise in Canadian COVID-19 cases. On Tuesday, Oct. 6, Canada reported 2,364 new infections—the highest daily total since the pandemic began. Several U.S. states have also logged record case increases, and the White House has become a coronavirus hot spot of its own. It’s understandable that many people fear a return to strict lockdowns and more limits on everyday life.
Investors are watching these developments closely. The possibility of renewed restrictions or rolling closures threatens to stall the economic recovery that began after March. Since September 2, the S&P/TSX Composite Index has slipped about 1.3%, while the S&P 500 is down roughly 2.7%—partly driven by concerns over rising case counts and the uncertainty around the coming U.S. election.
For active investors wondering how to position themselves for a prolonged pandemic, the outlook generally breaks down into two plausible scenarios, short of an effective, widely distributed cure: a full lockdown similar to the spring, or a pattern of intermittent, targeted restrictions while the broader economy remains largely open. Below are practical considerations for each scenario.
Scenario 1: Total lockdown
A full lockdown would be disruptive and painful, but investors should prepare for heightened market volatility either way. If widespread quarantine returns, continue holding the companies that benefited most during the spring and summer. Technology firms that enable remote work and digital services—think major platforms, cloud providers, and collaboration tools—tended to outperform. Consumer staples and grocery retailers also showed resilience as people shifted spending to essentials.
With short-term interest rates near zero, bonds currently offer very little income, so dividend-paying stocks that reliably grow their payouts become more attractive. Look for utilities, industrial real estate investment trusts (industrial REITs tend to be stronger than office or mall-focused REITs), and other steady income generators that can withstand a weak economy.
Growth stocks typically outperformed value stocks in the spring, and that trend could continue in a renewed lockdown. Many deep value names today represent businesses that face structural challenges and may not return to their previous performance; some could persist only by relying on cheap financing, effectively becoming “zombie” companies. Be cautious with brick-and-mortar retailers, airlines, and other sectors that have struggled since March—while government support can provide temporary relief, long-term viability varies by company.
Investors often worry that technology stocks are too expensive after their sharp recovery since March 23. The truth is mixed: some shares are richly valued, while many large tech companies trade at reasonable price-to-earnings ratios because their earnings have grown. In an environment of prolonged low interest rates, higher valuations across the market become more defensible: when discount rates are low, investors accept higher prices for future earnings. That reduces the signal that “high valuation” would usually send in a normal-rate environment.
Scenario 2: Tighter restrictions, but still open economy
If authorities rely mainly on targeted measures while keeping most of the economy moving, many of the same pandemic-era winners retain momentum. Remote-work technologies and e-commerce will likely remain strong, pressuring traditional retail and mall landlords. However, in a scenario where activity gradually improves, reallocating some capital from the top-performing pandemic winners into cyclical sectors could make sense.
Financials are a case in point: bank stocks have been pressured by low rates, which compress net interest margins, yet banks benefit from rising economic activity and loan demand. Industrials—including auto manufacturers and suppliers—and leisure-related businesses such as travel and hospitality could recover as mobility increases. The trade-off isn’t simply “cyclicals versus defensives”; instead, investors should assess which companies are likely to regain traction as restrictions ease and which pandemic-driven winners may pull back.
Dividend-paying equities still look attractive in this scenario, provided companies can sustain distributions. With interest rates expected to remain low for an extended period, income-generating securities can offer stability and steady returns while the broader economy oscillates between restriction levels.
It’s all about the stimulus
One major factor that can buoy markets under either scenario is fiscal stimulus. Central banks in Canada and the United States have eased monetary policy aggressively with quantitative easing and near-zero rates, but fiscal support from governments determines how much cash ends up in households’ and businesses’ hands. Direct payments and wage or employment supports were a key reason markets recovered after the spring slump. If fiscal stimulus wanes or stops before the recovery is secure, markets would likely react negatively. Conversely, continued or targeted fiscal support could stabilize markets and support valuations.
The outlook
The path ahead is uncertain. Policy responses in the U.S. and Canada have varied and shifted quickly, and the size and timing of future stimulus remain in flux. If a full lockdown becomes necessary, governments may need to roll out larger fiscal packages than they would under lighter restrictions—raising questions about how far they are willing to go.
Given the uncertainty, a prudent approach is to focus on growth names with durable structural advantages, income-generating securities that can provide stability in a low-rate world, and a long-term horizon. Volatility may be elevated for months or even years, so investors who emphasize companies with resilient cash flow, sustainable dividends, and clear growth trajectories should be better positioned to weather either scenario.
More from Bryan Borzykowski:
- The right way to sell stocks during COVID-19
- How to tell if a company is honest
- What dividends can tell you about a company’s health
- What P/E can tell you about a stock, and what it can’t