I hope everyone was able to enjoy Canada Day this week. Celebrations were likely muted due to social distancing but the sun was out and Kieron and I took the opportunity to go for a long hike, while our two children slept in. We have been enjoying hiking on many different trails in Dundas Valley. A trail map can be found here if you are interested in exploring Dundas Valley by foot, bike or horse! Europe announced that Canada was listed among 14 countries whose travelers will be allowed to enter Europe starting July 1. I know I am not ready to get on a plane yet, or face the 14 day quarantine upon return but still want to vacation away from home. Keep Exploring Canada has some great information on travelling across Canada, especially if you too want to avoid flying. The site has information on 6 scenic drives through Ontario and the best road trips in Canada!
Market and Economic Update
Canada Day and U.S. Independence Day tend to mark the official start to summer, unfortunately this year we have to consider if these holidays could also lead to a spike in COVID infections. Some parts of the world, Canada included, are generally stable or seeing lowering numbers of new daily cases. However, globally the trend upward in new cases is troubling. The region that has become most disconcerting is the US, which has been experiencing what many see as a deterioration. Just a week ago, the country was averaging close to 35,000 new daily cases, nearly double what it was a month ago. That figure continues to rise and this week we saw 50,000 new daily cases. This is now forcing a number of states to scale back their reopening plans, reintroduce restrictive measures and mandating the wearing of masks. The chart below (from cdc.gov) shows that the numbers started to increase a few weeks after the Memorial holiday. This alone was not the cause of increased infections in the U.S. but holidays seem to increase the odds of people loosening the guidelines in place to protect them. This article describes How 'Superspreading' events drive most COVID-19 spread. We continue to watch the U.S. closely and the impact of COVID on their economy. We know the Canadian economy is highly tied to our neighbours, regardless of our COVID numbers.
Goldman Sachs came out with an interesting piece arguing the economic benefits of a national face mask mandate. They concluded that mandating the wearing of masks could be a strong substitute for renewed lock downs. Further lock downs would likely subtract nearly 5% from GDP - or $1 trillion, further challenging the recovery. Their research also showed that countries that took longer to adopt widespread mask usage had higher levels of infection and deaths. In the U.S. mask wearing has become a political issue but most state governments are eager to get their economies back on track. If they can avoid shutting down the economy again by using masks it is not a surprise that a few states have already mandated mask wearing in public. If you are interested in learning more read Face Masks and GDP.
The markets have barely blinked at the increasing U.S. COVID cases. Global markets have been much more resilient compared to when the virus first emerged earlier this year. Why is this? It could be because the virus is better understood and we have become used to large daily new cases. There is extensive work and progress on both vaccines and therapeutics and it is unlikely that we will see full scale lock downs in the future. Another important consideration is the sizable amount of government aid being pumped into the economy, helping both businesses and consumers. We are seeing positive economic momentum continue with strong economic data. The U.S. added more than 4.7 million jobs in June after 2.7 million jobs gained in May. The unemployment rate fell but still remains at a very high level of 11.1%. While the Q2 numbers are still not great, the improvements showing near the end of the quarter are a positive sign.
Canada lost its AAA rating last week with Fitch downgrading sovereign debt to AA+, reflecting the "deterioration of Canada's public finances in 2020 resulting from the coronavirus pandemic." Federal debt levels are still relatively low when compared to our developed peers but provincial debt is quite substantial and will ultimately place a burden on federal finances. Canadian consumers are among the most indebted in the world relative to their disposable income. These concerns will likely be a drag on our ability to quickly recover in Canada. Nevertheless, market reaction to the downgrade was muted as it was largely expected at some point.
How do we invest through this? We remain defensive in our discretionary portfolios until we gain more confidence in the speed of the recovery. This does not mean we are not seeing growth. We continue to monitor consumer spending which you can read more about in RBC Economics' COVID Consumer Spending Tracker. Consumer spending is nearly back to normal, with spending high in clothing and home items. Of note was online spending, it remained high despite store re-openings in May. This continues to bode well for companies like Amazon. Explosive demand for online shopping and surge in remote work have been a boon for Amazon's core retail offering and AWS, its cloud computing business. Mark Mahaney, RBC's Internet Analyst shares his views on Amazon and if the company can capture and sustain this once-in-a-generation opportunity. Listen to How the crisis became prime time for Amazon.
This pandemic has proven that online shopping is here to stay but where exactly does that leave retail shopping malls? In this RBC Disruptors article and podcast The Retail Shift: How Technology is Shaping the Mall of the Future John Stackhouse discusses what a "new mall" could look like as malls around the world begin to come out of hibernation and reinvent themselves to survive during these times.
Your Financial Health
Many of us have children or grandchildren looking for employment. The COVID-19 crisis has impacted Canadian's employment levels but young people have been hit particularly hard with a nearly 30% unemployment rate. The summer months, when many students are looking for seasonal work or new graduates are looking to start a career, could be challenging as employers may call back their furloughed full-time workers before hiring students. RBC's Deputy Chief Economist, Dawn Desjardins, discusses in the podcast A cloudy outlook for young job seekers, how these setbacks may affect this cohort's long term employment prospects and how effective the government relief programs have been.
Prior to COVID, Canada's housing market had become out of reach in terms of affordability for first time homebuyers. RBC Economics looks at how the Recent Housing Affordability Loss May Prove Temporary and expects that moderately lower home prices and exceptionally low interest rates may improve housing affordability. In early June, the CEO of CMHC testified to the Standing Committee on Finance about his concerns around the impact of household debt on the housing market, particularly in a recession, after a number of years where demand has outstripped supply. It is the demand-supply imbalance that has seen housing prices balloon in recent years. In his testimony he noted that CMHC is forecasting a decline in average house prices of 9 - 18% in the next year. Oil producing regions and geographies where home prices had got ahead of themselves will likely see greater declines. There is concern over the impact of the mortgage deferral ending in the fall and he noted that as much as one fifth of all mortgages could be in arrears if our economy has not recovered sufficiently. CMHC, at the time was reviewing their underwriting policies in hopes of reducing demand. Since then CMHC has announced changes: CMHC tightens mortgage insurance rules starting July 1.
I wanted to end the blog this week on a lighter note and what better way to celebrate being Canadian than sharing our stories of kindness and generosity with one another? RBC has launched Random Acts of Canadian to help celebrate acts of kindness in these challenging times. You can submit your own story that could be featured or read other people's stories to become inspired and see how Canadians are supporting each other and their communities.
Finally we would also like to wish our American readers a safe and happy 4th of July!
Enjoy your weekend everyone and we may just see you out on the hiking trails!