Covid-19 remains a part of our everyday lives, although its impact from both a health and economic perspective has changed considerably. Global markets and investors continue to monitor this impact, focusing on the developing trends that are expected to be drivers of economic growth once the prevalence of the virus diminishes.

Coronavirus Update

While investors are not as concerned as they once were, the virus continues to spread throughout the world. Canada has seen its average new daily case levels and its seven day moving average of new daily cases trend higher in recent weeks, indicating the rate of spread is now rising after a period of stagnation. While the figures remain well below the levels seen during the first wave, it warrants monitoring, particularly with back to school and the fall season, where indoor gatherings will become more common.

Elsewhere, India, Indonesia, the Middle East, and Europe are all facing escalating situations. Countries are implementing a host of measures to try to contain the spread of the virus, from broad lockdowns to enforcing restrictions on social gatherings.

Despite the ongoing pandemic, investors remain less concerned than they were earlier this year. The rationale is based on the view that fatality and hospitalization rates are lower and governments are likely to employ more localized containment approaches instead of full scale lockdowns. Also, hope for a vaccine remains high, possibly even before the end of this year.

Market Update

We have seen a return of market volatility over the past several weeks, though sparked by no obvious catalyst. The level of volatility has remained relatively flat, suggesting that investor anxiety has not deteriorated and the action remains reasonable and relatively normal. Much of the market decline is being led by high growth technology stocks, the same ones that have led the market higher since the lows of March. I suspect this is a combination of the market recognizing an overly rich and optimistic valuation for a few select positions and investors taking some profits after some meaningful gains.

Economic Recovery Continues; Less Easy Going Forward

With much of the global economy shut down earlier this year, the easy part of the economic recovery was expected to unfold once the lockdowns were lifted. And that’s largely what happened in recent months as mobility increased, some businesses reopened, and workers started to return to work. Global data over the past month has suggested that while momentum has moderated, the economy remains very much in recovery mode. The global services sector, which includes businesses in areas such as hospitality and leisure for example, was hit particularly hard. But data for the month of August across Europe, Asia and North America suggest this sector continues to recover. The pace, however, has moderated, which I attribute to a normal levelling off following a strong initial rebound.

Over the past few weeks, the Bank of Canada, European Central Bank, and U.S. Federal Reserve have acknowledged the strength in the recovery, with some even suggesting a return to pre-Covid levels of economic production by the end of 2021, rather than earlier projections of 2022.

The path going forward may prove to be a bit more difficult than it has been in recent months. Many of the government programs that were initiated in response to Covid are on the verge of change, by either expiring or transitioning to new programs. I expect few governments have an appetite to once again revisit full scale lockdowns, instead considering some combination of smaller measures to slow the spread of the virus. These actions won’t result in the massive economic hit that was suffered earlier this year, but they will inevitably have some impact. It suggests that economic activity may have more potential to ebb and flow in the months ahead rather than simply trend higher.

Signs of encouragement in the markets do exist. Amidst the recent volatility, small-cap indices and cyclical stocks held their value much better than the large cap growth companies. Both might indicate a broadening of the market and perhaps a rotation into new leadership.

The notes that I published in the early days of the Covid-19 pandemic suggested the forced, temporary shutdown of economies would eventually result in a strong recovery on the other side, though the market rebound has admittedly been stronger and faster than I expected. The weakness and volatility we have seen recently may simply be a typical pause and period of consolidation, but it may also mark a transition period where investors adjust their expectations to reflect a more uneven growth phase ahead.

Acknowledging the End of Summer

It’s an ongoing joke in our house that returning to school in September marked the end of March Break. Recall that the initial school closure announcement was for two weeks in March following the regularly scheduled March Break. We all know what happened next. While summer 2020 in our house can be described as disappointing, creative, novel and unique, all for different reasons, we thought it was important to mark its’ end. With some careful planning, restrictions on packing, and a surprising lack of instruction, we piled into a 31-foot RV for eight days and seven nights and saw parts of central and eastern Ontario that everyone should experience at some point in their life. Overnight stops were in Tobermory, Awenda Provincial Park, Bon Echo Provincial Park, the Parks of the St. Lawrence, and the 1,000 Islands, allowing us to hike, bike, paddle and swim some of the provinces greatest treasures. Highlights included The Grotto, sunrise on Georgian Bay, Mazinaw Rock, and an evening boat cruise in the 1,000 Islands.

With our three girls now in highschool and the two boys soon to join them, there will be limited opportunities in the future for us to spend this kind of time together. It was such an incredible experience and we’re fortunate to have been able to pull it off. We consider it one of the few silver linings of what has been a truly unpredictable 2020.