Another Look at the 30,000 Foot View

Jul 17, 2020 | Nick Scholte


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Let's take a point form look at the Good and the Bad in the current Covid-19 economy.

To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 2.6%; the U.S. Dow Jones Index up 2.3%; and the U.S. S&P 500 up 1.3%.

This week let’s keep it to a point 30,000 foot view of Covid-19 and its related impact upon the economy:

The Good

- Treatments are improving with drugs such as Remdesivir and modified techniques such as the more judicious use of ventilators

- Death rates are lower, likely as a result of improved treatments and a generally younger demographic becoming infected

- On the vaccine front there are dozens of “shots on goal” via candidates from pharmaceutical companies around the world

- Every day brings us closer to the potential introduction of a vaccine

- Central banks worldwide have been forceful in support of their respective economies

- Governments worldwide have been pumping massive amounts of fiscal support into economy sustaining programs

- There has been a strong rebound in economic data from the March/April apex low

- There have been some very real stock winners in the Covid-19 environment such as Amazon and Apple (owned by discretionary clients) and Netflix and Crowdstrike (not owned by discretionary clients)

 

The Bad

- The economic rebound represents, in my opinion, the low hanging fruit of recovery… gains from here will be much more difficult

- The neighborhood to which the economy has “recovered” is substantially weaker than that enjoyed in December 2019… recovery to pre-Covid-19 economic output levels is at least a 2021 story, with a very material chance of occurring substantially later

- There have been far more stock losers in the Covid-19 economy than the “winners” noted above (in fact, the outperformance of the mega-cap technology names is materially masking a more widespread weakness in markets)

- Daily new cases are rising materially in the U.S. Further, while case increases are certainly worst in the south, there are now notable increases occurring broadly across most other states in the country as well.

- While the death “rate” is declining (i.e. the number of deaths is declining per 1,000 infected), as noted in last week’s update the absolute number of deaths has now begun to turn up given the very material increase in cases being reported

- Test positivity rates are also on the rise. This metric is viewed as confirmation that the increasing case count trend is a result of increased community spread rather than just a greater number of tests being administered.

- Pauses and rollback in state reopening plans are accelerating. So too are corporate measures such as store closings (negative) and mask mandates (although in the “Bad” section, this is actually a positive)

- Flu season is coming

- School re-opening are coming

- Both of the former have the potential to exacerbate the negative social and economic environment brought on by Covid-19

- While a vaccine is being worked on with unprecedented urgency, there must be scaled production and use of any vaccine commensurate with the need. This means nearly 400 million doses will be required in the U.S. and Canada. Owing to the rush, will populations perceive the vaccine as safe and willingly submit to vaccination?

- There are emerging reports that Covid-19 antibodies may not be particularly ”durable” – this might imply that the efficacy of vaccines might not persist.

Overall, at the very least, there are many risks in the current environment.  In my opinion, these risks skew to the downside. Despite continued market strength and optimistic valuations, I remain comfortable current client positioning that has a slightly below neutral equity (stock) weighting.

That’s it for this week. All the best and stay safe,

Nick

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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