This week ended roughly where it started as the market seesawed between modest gains and losses. This tug of war was somewhat fitting because it encapsulates an interesting dynamic. More specifically, the risks posed by the pandemic offset, for now, by the efforts undertaken by governments around the world to buy time for their economies to recover.                                                                         

 

Investors remain focused on the U.S., where there are rising new daily cases across several states such as Texas, Arizona, California, and Florida for example. Some of these states have indicated the average age of the newly infected appears to be meaningfully younger, which may help limit any strain on the health care system should hospitalization rates be lower.

Some positive news did emerge this week with respect to a therapeutic. A well-known steroid called dexamethasone, used to treat a range of conditions such as arthritis, asthma, and allergies, was found to help the survival rates of some of the sickest virus patients. While details are still sparse, this could improve the ability of the population to cope with the disease.

The Canadian government took action this week and extended one of its pandemic-related programs, the CERB (Canada emergency response benefit), by two months. For more information on the CERB extension check out the CERB website.

These aid packages are costly and will undoubtedly add to the high debt burdens that governments around the world are already wrestling with. But, that’s a problem for another day and something we will discuss in the future once this crisis subsides

I recently saw a chart provided by Fundstrat, an independent research company in the US. It shows there is $4.7 Trillion on the sidelines in money market fund assets. This is now above the level of cash on the sidelines in January 2009. Although investors seem to remain skeptical about the market rally, historically speaking, a market top is not normally characterized by record cash in money market funds. So when we are investing new money into the market today, we think about the fact that a portion of this record amount of cash will eventually enter the market after us.

Source: ICI and Fundstrat

Lori Calvasina, Head of U.S Equity Strategy for RBC Capital Markets recently noted that Pessimism may have simply gotten too extreme.Various gauges of sentiment have been starting to improve from levels that had marked important turning points, if not absolute lows, in the past. An example of this can be seen below:

Looking forward, market conditions are considerably different from the strong equity market of 2019. Due to the volatility caused by the coronavirus pandemic, central banks have pushed interest rates to all-time record lows. This has been positive for bond prices but substantially erodes the future return potential for low yielding government bonds.

As mentioned on page 3 in this week’s Global Insight Weekly, Credit rallied on Monday’s surprise announcement the Fed would begin buying individual corporate bonds. Therefore, within the Fixed Income portfolio, we are comfortable moving the positions a little further along the risk curve. We feel that by modestly increasing our exposure to corporate bonds and reducing government bond holdings, we increase the return potential while remaining heavily skewed towards high quality, investment grade bonds.

From current valuations, corporate bonds have historically outperformed government bonds, with high-yield bonds often managing to keep pace with equities early in recoveries. Ratings downgrades and default rates are expected to rise in the coming months, but we believe these concerns are reflected in the yield advantage, while monetary and fiscal efforts to stem a tide of defaults could be supportive. We continue to maintain exposure to government bonds as they have provided a cushion against the substantial losses in equities and corporate bonds year to date and serve as a source of liquidity in challenging markets.

 

 

On Wednesday, June 17th Jim Allworth, Portfolio Strategist at RBC Dominion Securities held an informative discussion on the current market outlook and economic trends. We have provided the dial-in phone number and reservation (program ID) number for the audio playback below.

Playback Details:

North America Dial-In Number: 800-558-5253

International Dial-In Number: 1-416-626-4100

Once prompted, enter Reservation (Program ID) number: 21964631

As stage two of fully re-opening Ontario approaches, Paul Maxwell (Pictured below in front of his work from home space with his dog Penny), the teams Associate Investment Advisor can’t wait to get back to playing pool and relaxing on the summer patios with is wife. It is important to know what regions are in which stages of re-opening, so Paul regularly checks the Ontario government website (Click Here) to see the current stage of re-opening in his region. There is also a lot of useful information on how to stay safe once the phases move forward.