Global equity markets were marginally lower over the recent 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 situation, and share some thoughts on Canada given the government’s decision this week on existing and new aid programs. Lastly, I will touch on the Canadian banks who are set to report next week and conclude with comments on recent market performance.
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 hadn’t been seen in months, and similar trends have emerged elsewhere in the region.
Interestingly, these developments have not necessarily impacted markets. Investors may not view the virus as much of a surprise as it was 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. The appointment marks the first woman to hold Canada’s top economic post as 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. Essentially, Freeland has been tasked to do more than restart the economy. She’s expected to help transform it. 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 (and divert some attention from the WE controversy). There were five key developments:
1) the Canadian Emergency Response Benefit (CERB) will be extended by another month through until 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;
5) 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
Lastly, 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.
S&P500 hits all time high
There is much news and media blasts about the market and disconnect between the market and underlying fundamentals. While pullbacks are a normal part of any market cycle and should be expected, it is important to look into the context of the moves we are witnessing. Ben Graham, RBC Capital Martket LLC Analyst from Minneapolis, spoke directly to this in today’s RBC Wealth Management ‘Global Insight’ report. “Specifically, the S&P 500 was 5.8% higher on a total-return basis as of the close on Wednesday, Aug. 19 after the prior day’s all-time closing high. However, it’s important to realize that six of the largest and most technologically advanced companies in the world have had an outsized impact on 2020 returns. These companies are Facebook, Apple, Amazon.com, Netflix, Google-parent Alphabet, and Microsoft (FAANGM). Collectively, they account for nearly 160% of the S&P 500’s annual gain. Put differently, if an investor held the S&P 500 without the FAANGM complex and instead allocated to the remaining 494 companies in the index, the hypothetical 2020 S&P 500 return would be -4.2%. Understanding this point is imperative as investors try to wrap their minds around the state of the world and the index returns that appear to have decoupled from reality. The bottom line is that U.S. equities, excluding the largest tech-oriented companies in the world that have actually thrived during COVID-19, are not as disconnected from the pandemic and economic narrative as headline returns would cause them to appear to be.”
Thomas Lee from Fundstrat Global Advisors also spoke to this early in the week. “There is a high level of apprehension around stock prices as they approach new highs. In short, many investors suggest "the stock market defies logic because we are in the midst of a Depression, yet stocks are making new highs." But as we all know, the equity market rarely makes sense (consistently)” says Lee. Further, it is pretty common for stocks to make all-time highs while in the middle of a recession. Ryan Detrick, of LPL noted “there are 5 instances, where stocks made "new highs" while in a recession - Feb '61, July '80, Nov '82, Mar '91 and, Aug '20.”
Please continue to call us as we love talking to our clients. Our entire team stands ready to listen and speak with you. We can also be made available to speak with any family and friends who may need reassurance during this time.