Things were relatively calm over the past week, as evidenced by the decline in market volatility. It’s been reassuring despite the headlines around the global Covid situation that remain troublesome. Growing comfort with the incoming U.S. administration has likely contributed to investor sentiment, particularly given another large stimulus package that will be among the very first items on the government’s agenda. One of the underlying trends that began late last year – so-called “cyclical” stocks leading the market - has remained very much in place to start the year. This presents a tailwind, for now, for the Canadian stock market. We explain a bit more below.
The bottom-line remains the same as it has for some time. More specifically, the virus spread is proving to be very difficult to contain despite significant efforts around the world. The hope is that in the months to come, we will start to see evidence of growing immunity and a slowing of the spread. The Middle East may provide some early clues around that thesis in the not too distant future. The region is more quickly vaccinating its population with Israel leading the way at more than 20% of its population. The United Arab Emirates and Bahrain are not too far behind. The 70% threshold is widely considered to be a minimum level needed to approach some form of herd immunity.
In Canada, the 7-day average rate of new daily infections stagnated this past week, an encouraging sign given the post-holiday surge witnessed more broadly across the provinces a week ago. Some are faring much worse than others, with Saskatchewan and Ontario leading the way. Positively, there was a slowing in the average rate of new daily infections across Quebec, British Columbia, and Alberta. Meanwhile, Manitoba’s average new daily figures are nearly half of what they were a month ago, suggesting its measures have been successful at slowing the spread. In the Maritimes, the spike in new cases at the beginning of the year has not worsened, leaving a stable situation for the time being.
Cyclicals leading the way
The investment community often segments the stock market into different categories. Two such groups are “growth”, defined by stocks with high revenue and earnings growth, and “value”, often regarded as stocks that are inexpensive and trading at low levels relative to their earnings, cash flow, or book value.
For some time, and in particular during the past year, the so-called “growth” stocks meaningfully outperformed. Many of these were regarded as having business models that would not only fare much better, but even thrive, through the disruptive environment that remains to this day. However, late last year, that sentiment appeared to shift, with “value” stocks beginning to perform better based on growing conviction that a combination of successful vaccines and enough fiscal stimulus would lead to a sustainable global economic recovery that could help revive their earnings and cash flow. That trend remains in place to start the year and is helping some parts of the market that were particularly hard hit in 2020.
Many of the aforementioned “value” stocks represent businesses that are cyclical in nature, meaning their revenue and profits are heavily tied to the ebbs and flows of the general economy. The Canadian stock market has its fair share of these “cyclical” types of stocks across sectors such as Energy and Financials for example. Consequently, it’s not too surprising that the Canadian equity market has been performing a bit better than some of its global peers to start the year. We suspect this may continue for a little while longer.
It is very challenging to predict the timing of shifts in investor sentiment and performance of various styles and groups of stocks. As a result, our approach is less focused on timing and more geared towards having well-constructed and diversified portfolios that inevitably offer exposure to a range of investments across these categories. Nevertheless, we continue to view this trend as a sign of confidence in the eventual recovery that may be upon us once we get through the challenging first half of the year.
We are pleased to share the latest investment strategy report from RBC Wealth Management: Global Insight Weekly.
More income ahead for fixed income markets?
Fixed income investors will largely have to play defense this year as bond markets try to work their way through to a more normal yield environment. And while the outlook is a challenging one for investors, borrowers still have time to take advantage of record-low mortgage rates.
Regional developments: Canada’s business outlook hits optimistic tone; U.S. small caps’ winning streak continues; Italian political turmoil likely to subside; State of emergency in Japan
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