To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 1.9%; the U.S. Dow Jones Index finishing down 3.3%; and the U.S. S&P 500 finishing down 2.9%.
Covid-19 cases continue to surge across many parts of the U.S., leading yesterday to the highest single day case count since the crisis began. Given that few, if any, mitigation measures had been put into effect by state governments until the past 48 hours, and given the lag from infection to diagnosis, it is almost certainly the case that cases will continue to significantly rise over the next two weeks. Many states – and large ones at that (California, Texas and Florida) – are seeing exponential increases in case counts. Broadly speaking these surges are being seen in the southern and western U.S. However, when examining the state-by-state 7-day moving average case trends (a big thank you to the client supplying this data), to my eye there are early signs of increases in other important states such as Illinois, Ohio, and Pennsylvania. The trend is worrisome.
The preceding being said, states are finally beginning to respond. Yesterday Texas “paused” its reopening plan, and took the next step today by beginning to reverse course by mandating bars once again close for business. Likewise, Florida took the same step today also. Corporate America is also starting to respond. Apple added a handful more stores to the “closed for business” list it announced last week. Disney indefinitely postponed the reopening of Disneyland in California. Given a very substantial leap in Florida cases announced today, I’d be surprised if the re-opening of Disneyworld Florida is not soon postponed also.
Frankly, I perceive the U.S. to have a problem that other developed countries of the world do not face (at least not to the same degree) – namely, that a large swath of the population is very independent and libertarian in its disposition. It could be argued that this independent/libertarian streak is a strength and source of innovation during “normal” times, but at a time when adherence to government edicts such as wearing masks and maintaining social distance are so crucial to a successful fight against Covid-19, it strikes me as a structural weakness during this less than normal time. In comparison, Canada, which early on in this pandemic was generating new cases at approximately half of the per-capita rate of the U.S., is now seeing new cases at about 1/10th the U.S. rate (in other words, Canada is now reporting roughly 1 new case for every 100 reported in the U.S.; based on the population differential, one would expect Canada to be seeing 10 cases for every 100 in the U.S.). So, at this juncture, Canada would appear to have flattened its curve and been successful at keeping it flat. Again, with new highs in cases, the U.S. not so much.
Now the foregoing seems decidedly negative – and it is. BUT, there are several factors which lead me to believe that a return to the March 23rd stock market lows is unlikely (certainly not impossible, but unlikely in my opinion). These are: massive monetary stimulus by the U.S. Federal Reserve; massive fiscal stimulus by the U.S. government; similar measures taken by central banks and governments worldwide; a better ability to treat Covid-19 patients as doctors and health care professionals learn and improve their techniques; lower death rates since a higher percentage of the new cases being reported are among younger demographics which generally are healthier and more resilient to the disease; the growing development of “herd immunity” as a greater percentage of the population becomes infected and would likely be resistant to re-infection (the very successful, and almost textbook-like, flattening of the curve in New York is thought to be at least partially attributable to this phenomenon as Dr. Scott Gottlieb suggests that perhaps 30% of New Yorkers may have been infected); and, most importantly, as every day passes we are presumably one day closer to a vaccine treatment.
Current equity (i.e. stock) positioning in portfolios is slightly underweight relative to each client’s target weight in their individual Investment Policy Statements. Several new clients I have been fortunate to bring on during this crisis are even more underweight than this as I look to build their portfolios up to my intended target weights. I suspect news flow the next few weeks will worsen further and that this may provide an opportunity to bring all portfolios up to a full neutral weighting, and rotate some of the ETF exposure I added 3 weeks ago into more specific stock opportunities.
That’s it for this week. As always, 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
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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