Weekly Letter: A Perspective on the 2020 Financial Markets

Sep 11, 2020 | Warren Andrukow


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Global equity markets experienced some jitteriness over the past week, following through on some of the weakness that began the week before. We provide a bit more colour on the recent action and address the growing importance of the technology sector. We also provide an update on the coronavirus front, with particular attention paid to the rising trend of cases in various parts of the world, including Canada, and a setback on one of the vaccines being explored in a late stage trial.

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 trend higher in recent weeks, indicating that 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 bears monitoring, particularly in light of the back to school and fall seasons, where indoor gatherings will become more prevalent.

Elsewhere, India, Indonesia, the Middle East, and Europe are all facing escalating situations. India surpassed Brazil as the country with the second highest number of cases. It recorded a daily record for any country of more than 90,000 new cases suggesting there is no sign of its spread slowing. Meanwhile, the Indonesian capital of Jakarta has enforced a strict lockdown to try to contain the spread of the virus which is putting serious strain on the city’s health care infrastructure. Across the Middle East, a host of countries are grappling with rising cases and Israel for example is exploring a broad lockdown given accelerating levels of new daily cases. And countries such as France and Spain have surpassed their own record new daily infection levels witnessed months ago.

Despite the ongoing pandemic, investors remain less concerned than they were earlier this year. The rationale is based on the view that fatality rates are lower and governments are likely to employ more localized containment approaches instead of the full scale lockdowns seen across much of the world months ago. Furthermore, hope for a vaccine remains relatively high. On this front, some disappointing news over the past week should serve to remind investors that developing a vaccine that is safe and effective is a difficult task and is by no means guaranteed. A late-stage vaccine trial was temporarily suspended for safety reasons after one participant developed a neurological condition. The case is being investigated further. These kinds of suspensions are not uncommon in clinical trials, and the trial itself may continue at some point.

Market Concentration

Markets sold off over the past week, continuing a trend that started just over a week ago. Notably, the level of volatility this past week did not increase but remained relatively flat, suggesting investor anxiety has not deteriorated and the action remains reasonable and relatively normal. The market decline is being led by higher growth stocks, many of whom happen to be tied to technology products or services in one way or another. Many of these stocks have led the market higher since the lows in March, and so it’s not a real surprise to see investors taking some profits at this juncture.

In our view, what is more interesting, and worth appreciating, is how meaningful the technology sector has become. About five years ago, the sector represented a measly 2% weight in the Canadian equity market and a much more substantial 20% weight in the U.S. Today, those weights are nearly 10% and just under 30%, respectively. These numbers are even higher if you factor in stocks that are classified as being in other sectors but are very much technology oriented.

The level of concentration is not necessarily uncommon. In Canada, the Financials, Energy, Materials, and Technology sectors have all accounted for a much higher weight in the market at one point in history. In the U.S., some of these same sectors in addition to Healthcare have also been significant weights in the market, albeit not as high as technology is today. Furthermore, the level of concentration tied to a few stocks or sectors is actually higher in other parts of the world like South Korea, India, Germany, France, Italy, and Australia for example. Nonetheless, there’s no denying the fact that technology and related areas have grown in their significance and are now a much more important driver of equity market returns and risk in North America and beyond.

Our investment approach remains focused on ensuring the proper level of risk is being taken over time to deliver on our clients’ required outcomes. This level of risk is unique to each client, and may also be quite different than the stock market itself. And unlike the broader market, we have the ability to actively manage our client portfolios to ensure that appropriate exposure across asset classes and sectors is being maintained in our portfolios at all times.

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.