There were some welcome developments this past week. More specifically, the Canadian banks reported results that allowed investors to breathe a collective sigh of relief. Beyond the banks, equity markets rallied further, but it was the inner workings of the move that was particularly noteworthy. We explain more below, and begin with an update on the status of the pandemic.

 

Coronavirus update

It has been roughly five months since the emergence of the coronavirus. Its global spread continued this week with Latin America in particular struggling to slow its proliferation. The number of reported daily new cases in some countries such as Brazil, Chile, Mexico, and Peru is a reminder that the situation remains serious. But elsewhere, the progress witnessed over the past month in Canada, the U.S., and Europe largely continued this week. New cases are slowly grinding lower in Ontario and Quebec if you look at the figures smoothed out over a few days. There have been sporadic clusters of outbreaks this week in Seoul (South Korea) and even within our own borders in New Brunswick. Certain states in the U.S. have shown increases in new daily case counts, as we have grown accustomed to seeing. But, there have not been any signs of more meaningful acceleration in new daily case counts despite the staged reopening of economies over the past few weeks.

 

Big week for Canadian banks

Sentiment with respect to the Canadian banks had been very poor heading into last week. Investors struggled to understand the degree to which the sector would have to prepare, or provision as it is often called in investment terms, for future loan losses. Fortunately, the results reported by the banks were generally fine. To be clear, profits were down substantially. And provisions did increase exponentially with banks setting aside billions of dollars to prepare for bankruptcies and defaults. But the amounts set aside were generally lower than what some investors had expected, which provided some reassurance that perhaps the environment may not yet be as bad as some had feared. This may help explain why the sector was one of the strongest performers this week. Nevertheless, it is important to remain vigilant. The risk remains that the banks may have to increase their provisions even more than expected in the future should the economic damage be longer lasting. It is impossible to know. But, we remain comforted by their generally strong balance sheets and ability to pay sustainable dividends.

 

A rally with more participants

It feels comforting when markets are moving higher. But, not all market rallies are the same. Beneath the surface, there can be some that are driven by just a handful of the largest stocks and others that are driven by many smaller ones. One complaint about this recovery has been that a good portion of it has been led by large technology and other so called “growth” stocks, who increasingly make up a large part of many regional stock markets. But, within the past few weeks, that trend has been changing with other segments of the market driving a bigger part of the overall stock market gains. We view this as a healthy sign that reflects growing confidence in the economic recovery that is now underway.

 

Investors and policymakers will undoubtedly be watching the economic progress very closely over the next month. The significant income support programs implemented by the Canadian and U.S. governments more than a month ago are set to begin to expire in July. The hope is that enough workers will have been rehired by then to alleviate pressure on governments to do more. The degree and sustainability of the recovery, the geopolitical tensions between China and the U.S., and the pandemic remain risks that we will continue to monitor with great interest.

 

Should you have any questions or concerns, please feel free to reach out.

 

Sincerely,

Connor