Welcome to our third conference call in as many months. I hope you all enjoyed the sunny and warm weather we had this past weekend. It finally seems that the longest Spring I can remember is finally coming to an end.
Covid-19 remains a global crisis. We need to keep up with the developments, especially as we enter a critical stage of restarting the economy.
For today’s call, I will talk about:
- The hope of a vaccine
- Canadian Bank reporting
- Some comments and insight from Lori Calvasina, RBC Capital Markets Head of U.S. Equity Strategy, about “What a market recovery can look like”
- Getting back to normal, using Technology and social trends we are witnessing
- Our Team’s focus
- And finally, charitable fundraising efforts we are working on
Last week was marked by an early dose of optimism. More specifically, a promising update on a potential coronavirus vaccine and more progress on the easing of restrictions and reopening of economies. Offsetting this to some degree was the ongoing struggle to slow the spread of the virus globally, particularly in the emerging markets.
Vaccine hope
We recently highlighted the remote possibility for a vaccine to emerge over time given the unprecedented global efforts by the scientific community. We did not expect an update to come so soon. Earlier this week, a U.S. company provided encouraging results from a Phase I trial. In a nutshell, the vaccine showed the potential to induce the immune system to produce antibodies that could help protect people in a safe and tolerable way. The results spurred an impressive and understandable rally in markets as they priced in an increase in the odds of a best case scenario – immunity from the virus. But, as with most early stage clinical development, there are some important caveats to consider. These include the small sample size of 45 individuals, the lack of disclosure and data for analysis, and the durability of the antibodies among other things. While it remains very early and much more work is left to be done, it was an encouraging update. This is one of nearly 10 human trials and more than 100 pre-clinical trials (meaning the stage of research that does not include humans beings) that are underway globally.
Spotlight on the Canadian banks
The Canadian banks are set to report second quarter results over the next week. This is a particularly important update. First, the banks tend to be a good gage of the health of our overall economy. The results for the period of February through April, and management commentary on the outlook, will offer clues about the extent and trajectory of economic damage in this country. Secondly, the banks represent a meaningful portion of most Canadian investor portfolios. If the U.S. banks, who reported their own results weeks ago, are any indication, the results are not likely to be very good. But, that may already be expected by the market to some degree. Bank stocks trade at valuations that were last seen during the great financial crisis of more than a decade ago. This signals to us that investors already expect the companies to face higher risks in the form of future loan defaults and customer bankruptcies. While these loan issues may not arise immediately, the banks have to effectively budget for them in advance and it is widely expected they will begin to do so with the release of their results. We take some comfort in the strong capital positions they have accumulated in recent years that can help provide some cushion against the credit losses that may come. While earnings may be volatile and balance sheets will be tested, we believe the banks will continue to offer sustainable dividend income for investors.
What a recovery could look like
We have heard from Lori Calvasina of RBC, who has provided insight into what she is seeing on an institutional side of the market over the past several months. In her most recent post, she describes “What a market recovery can look like”. In this report she tries to answer the question, why are markets rallying so strongly while getting such bad financial data?
Although she thinks there could be more market volatility to come in the summer months, she does not think the rally is illogical. Some of the reasons for this is:
- Many feel the recession may be short in duration. Given that, it makes sense that the markets should bottom in the first half of 2020.
- Rate of change of the newsflow. Things started to get less bad after the lows we saw on March 23.
She feels that the valuation opportunity is behind us and that the S&P 500 is looking expensive based on their earnings target for 2020. The Election 2020 may start to get some more attention and she feels the main risk to the stock market is Trump will lose.
She concludes, but with a low conviction, that we have hit a bottom in March. One of the reasons for the low conviction and something that is bothering her is “We did not get capitulation from retail investors”.
There are many people trying to answer this same question of why have financial markets moved faster than the economic data. We are listening to many strategists and there are other schools of thought that provide us a balanced viewpoint of this current market. We will remain vigilant and maintain a cash weighting on portfolios to provide some dry powder for buying opportunities should they arise.
Getting back to normal
Someone asked me recently, “when do you think we will be back to see a hockey game or a concert?”
As the governments around the world reopen their economies, we get the sense that we may get back to business normalcy before we get back to social normalcy. Because of that, I think this will cause many people to remain skeptical about the resiliency of the economy and the impact on the stock market.
However, we have witnessed an even greater desire to harness smart technologies to transform pretty much everything. I have heard that Covid-19 did not crush the future, it merely brought it forward.
RBC put out a great article with "Free Cultural Experiences to Explore from your Sofa". From live performances, tours of museums and galleries around the world, travel to historic sites and outdoor adventures, all from the comfort of your sofa!
An article from the RBC Disruptors series discusses how Photography 3.0 can create an immersive, three-dimensional visual experience that can transport you to far-flung and remote places.
Our social normalcy may not be the same as it was or may take a while to get back to the way it was. I don’t know, but there are rapid changes to consumer and social behaviour. How we work, shop, watch, travel, and learn are a few of the 8 Trends Underway in the World Today. These 8 trends are discussed in a piece written in another article from the RBC Disruptors series. In fact, there are many great articles of interest in this series that I will provide the links to them in future blog posts.
Our Team’s Focus
As a team we have been working from home and adjusting to this way of business life. We are adopting new technologies ourselves. We are all set up with our home offices with two screens and access to our Virtual Private Network so working from home is relatively seamless. We just have to be more inventive at staying connected as a Team by having weekly Team conference calls and a virtual “Social Call” over lunch on Friday’s.
We are also back doing your Annual Review meetings and other client engagements via WebEx where we can not only share reports, but also video. We think it is so important to be able to see you at our virtual meetings. To stay connected.
Before a meeting, Chan Wall, our Associate Advisor, will send out instructions on how to set up WebEx on your computer and join our secure virtual meeting room. If you have any questions or concerns about using this technology, Chan will be happy to walk you through it on the phone, so don’t hesitate to ask. We will continue to improve on the use of this technology and over time we will all get through a steep learning curve.
At our reviews we are focussing on Wealth Management. We are finding out how the economic shut down has impacted you and talking about planning for the unexpected. As always, we are discussing cash flow and tax planning. Debi Cientanni, our Associate Wealth Advisor and Financial Planner, is working diligently at updating financial plans, staying up to date on the tax changes and stimulus packages being offered and helping the Team be thoroughly prepared for our meetings with you.
We are also opening new accounts during this time. Alex Perrotta, our Associate, is the Team member who is going into the office to scan documents in order to open new accounts. He tells me he is happy to get out of the house.
A focus this year will be on tax loss selling. This is an activity we review annually, however, there have been few years we can make much of an impact because there were few losses to realize. We have already harvested some losses this year and reinvested the funds or maintained the cash for tactical buying in the months to come. Our Associate Investment Advisor and newest team member, Paul Maxwell, is actively reviewing our models and your portfolios for this type of trading activity. We have an article discussing Tax Loss harvesting.
If you prefer to listen to a podcast on this subject, you can join the Head of RBC Wealth Management at this link.
Charitable Fundraising
We also think it is important to continue to support charities as a Team. In addition to RBC’s annual United Way campaign that we support, we have recently provided a donation to Foundation Fighting Blindness Cycle for Sight event. Like so many charities, their donations are down 30% in the months of March and April. I have participated in this ride in previous years and like so many things today, they are doing this ride virtually on Zwift this year.
As a Team, we are also planning a bowling event called Strike Out Childhood Cancer during Childhood Cancer Awareness Month in September. This event is normally held at Splittsville in Burlington, however, due to current events we are in the planning process of holding the event virtually this year. In 2019, we held the event in support of McMaster Children’s Hospital’s Oncology department, raising just over $5,500. We are already on our way with $3500 in support from the RBC Foundation and our Burlington branch. We are hoping to double that number by September.
On that note, I will wrap up my comments and I hope to see you, at the very least virtually, in the weeks to come.
Thank you and have a great week.