To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 1.9%; the U.S. Dow Jones Index finishing up 3.8%; and the U.S. S&P 500 finishing up 3.0%.
New daily infections of coronavirus continue to trend up worldwide having hit a new daily high of 116,000 new cases yesterday, driven by worsening outbreaks in developing countries. That said, infection rates in the developed world and, notably, the U.S., seem to have stabilized. If one looks at a chart of daily new infections for the United States, one will note the following generalized trend: a rapid rise in cases through early April; followed by a slowly declining trend through to early May; followed by a roughly flat trend line from early May through to present day. At least with respect to the U.S., this sideways trend line is encouraging insofar as it is not increasing at a time of a gradual re-opening of the U.S. economy and an increase in testing. I’d like to see this trend persist for a few more weeks before becoming more comfortable with the sustainability of the trend during subsequent stages of summertime economic re-opening (if, as has been speculated, there may be some correlation between temperature and viability of the virus). However, the cooler temperatures of autumn and the concurrent arrival of flu season may yet prove to challenge the capacity of healthcare systems.
I’ll leave it to readers to determine for themselves whether one perceives the preceding paragraph shades toward optimism or pessimism. Whatever perspective one chooses, the main issue remains: how will consumers re-engage in a socially distant re-opened economy? I continue to expect that there will be a cap on that economic participation until consumers can feel properly safe. Partially opened theme parks; limited entry to malls; 25% capacity sporting events (at best, most will be 0 capacity); 50% capacity restaurants (again, at best); partially occupied office buildings (which will have follow-on consequences for related support businesses) etc. etc. does not equate to an economy operating at full potential.
Also, U.S. tensions with China continue to escalate. Moments ago (as I sit typing this update) President Trump completed a press conference in which he aggressively disparaged China on a host of different fronts. I’ll not get into the merits of Trump’s grievances, but I will note the obvious: this is a stress that might play to President Trump’s base and aid his re-election chances, but certainly won’t benefit economic and market confidence. As I said the past few weeks – China tensions are likely to come increasingly to the fore and affect market sentiment in the weeks ahead.
As has been the message the past several weeks, I’ll continue to await a better risk/reward entry point to position client portfolios back to a more neutral stance from the current underweight stance. A better risk/reward entry point need not be a full re-test of the March 23rd lows – in fact, I suspect it unlikely (though certainly not impossible) that those lows will be re-tested. Fiscal and monetary stimulus packages argue against such an outcome. But current high market valuations in the face of a multi-generational economic dislocation seem equally unlikely to be maintained.
That’s it for this week. All the best and stay safe,
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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