Weekly Letter: A Perspective on the 2020 Financial Markets

Aug 21, 2020 | Warren Andrukow


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Global equity markets were largely unchanged over the past week. The resignation of the Canadian Minster of Finance and the virtually-held U.S. Democratic National Convention received a lot of media attention, though investors appeared less interested. We provide a brief update on the COVID-19 situation, and share some thoughts on Canada given the government’s decision this week on existing and new aid programs. Lastly, we touch on the Canadian banks who are set to report results soon.

Coronavirus Update

The two dominant trends remain the same. Namely, progress in some places and virus reemergence elsewhere. The U.S. continues to see improvement with new daily cases decelerating, with an average rate of new daily infections above 40,000 instead of the more than 70,000 peak reached nearly a month ago. There are other countries witnessing improving trends as well. More specifically, Russia has seen its elevated figures decline for several weeks. Australia appears to have passed its peak, and Brazil is finally showing early signs of progress.

But, there remain areas that continue to struggle, namely India, parts of Africa, the Philippines, and Indonesia where daily new infections remain stubbornly high. Most concerning is Europe, where it has become clear that the region is grappling with a second wave. Spain, France, and Germany all saw figures over the past week that haven’t been seen in months, and similar trends have emerged elsewhere in the region.

Interestingly, these developments have not necessarily impacted financial markets. Investors may not view the virus as much of a surprise as was the case months ago. Furthermore, investors may have grown more confident that society can adapt while economies remain functioning, even if below normal.

Canada – A New Finance Minister and New Aid Programs

Canada’s Deputy Prime Minister, Chrystia Freeland, was appointed as the country’s new Finance Minister. She takes over at what is arguably a critical juncture and will be tasked with addressing near-term and longer-term challenges. More specifically, she will be asked to help the country navigate through the current economic crisis, while ensuring our country is better positioned for long-term and sustainable growth. The government is said to want to explore issues such as sweeping social reforms and renewable energy. But, the country, like others, is already grappling with elevated fiscal deficits as a result of the pandemic-induced spending that may limit the extent of future investment and expenditures.

Importantly, the government made some significant announcements this week on existing and new aid programs to help the country deal with the ongoing economic fallout of the pandemic. There were five key developments:

  1. the Canadian Emergency Response Benefit (CERB) will be extended by another month through to the end of September at which point it will wind down and enrollees will transition to the Employment Insurance program (EI) should they qualify;

  2. EI – a reduction in the minimum hours worked to enable more people to qualify;

  3. the Canada Recovery Benefit program will apply to self-employed workers or those who are not eligible for EI;

  4. the Canada Recovery Caregiving program will be for eligible citizens who are unable to work because they need to care for a child, family member, or dependent as alternative care options are unavailable; and,

  5. the Canada Recovery Sickness Benefit is for those who are sick themselves or have to self-isolate because of the pandemic.

While investors will inevitably debate the effectiveness of such measures, we believe most appreciate that the actions taken thus far have helped soften the blow to our economy thus far. This week’s decisions will help buy more time for our economy to heal.

We hope to also see something soon from the U.S., though admittedly our patience is being tested. Negotiations have proven to be much more difficult and expectations are now for a much smaller stimulus package.

Canadian Banks – Not Out of the Woods

The next week will undoubtedly be an important one for Canadian investors. The Canadian banks are set to begin reporting their third quarter results. These will be for the period May through July, when the economy began to reopen and recover from forced lockdowns. Consequently, the results may be better than they have been, with a smaller build in reserves for future loan losses than incurred earlier this year. Nevertheless, this positive development, should it occur, may be largely attributed to the aforementioned government programs (CERB in particular) which continue to have the desired effect of limiting any customer or business delinquencies for the time being. Consequently, we won’t necessarily be drawing too many longer-term conclusions from the upcoming results.

Market Decline and Recovery Results

The peak-to-trough numbers for the current market decline and subsequent recovery are provided in the table below, as of today’s closing prices. This week, markets were up slightly in Canada, the U.S., and the Emerging Market countries, while countries in Europe and the Far East were down marginally. Of note is the U.S. market, where the S&P 500 index recovered back to the previous all-time high of 3,394 and finished the week three points higher at 3,397 which is now the new all-time high on a closing-price basis. The S&P 500 nearly broke through 3,400 points as it hit an intra-day high of 3,399.54 on Wednesday this week.