To my clients:
First, an announcement: I will be away for holiday from Saturday, August 8th through Monday, August 17th inclusive. Back in “the office” (still my home) on Tuesday, August 18th. While my family and I attempt to enjoy a socially distanced and mostly outdoor holiday in the Rockies, I suspect my connectivity will be limited. I’ll still check in and monitor markets as I’m able, but my response time to inquiries is likely to be substantially slower than normal. As usual, please contact Brenda for any urgent needs.
It was a mixed week for North American stock markets with the Canadian TSX finishing up 1.1%; the U.S. Dow Jones Index finishing down 0.2%; and the U.S. S&P 500 finishing up 1.7%.
Lots on tap this week…
First, though a surprise to no one, it was still shocking to see the U.S. 2nd Quarter GDP decline come in at a whopping annualized rate of -32.9%! Now the way this metric is reported can often cause confusion, so to better understand what is being measured let me note the following:
a) the reported 32.9% decline is measured on a quarter-over-quarter (QoQ) basis, and then reported as an annualized rate;
b) the figure is also adjusted for seasonal factors;
c) the “raw” QoQ decline was roughly 9.5% meaning that the economy shrank by nearly 10% from Q1 to Q2 of 2020 (note that the seasonal adjustments noted in “b” above, and the nature of compounding, means that you can’t just multiply 9.5% x 4 to get the annualized rate);
d) the Q2 GDP decline followed an annualized 5% decline in Q1;
e) the economic damage from the back-to-back contractionary quarters saw the size of the U.S. economy shrink back to levels last seen in Q2 2017 (in other words, 3 years of economic gains have been completely erased);
f) when reported later this autumn, the current Q3 quarter is sure to see a significant gain… but remember, since GDP is measured QoQ, the anticipated gain will be measured off of the lows seen this quarter;
g) RBC Global Asset Management pushed back its estimate for when the U.S. economy will regain its Q4 2019 high – it now anticipates this won’t occur until mid-2022 (the prior expectation had been the end of 2021)
In recognition of the “difficult place” the U.S. economy finds itself, U.S. Federal Reserve Chairman Jerome Powell one-upped himself this week by saying the Federal reserve “isn’t even thinking about, thinking about, thinking about” raising interest rates. Yes, he said it three times to hammer home the point (at the last press conference accompanying a Fed rate announcement he stated it “only” twice). In other words, the zero bound for interest rates will be maintained well into the future – a period to be measured in years.
As I have mentioned in recent updates, and again paraphrased above, there is sure to be a “reflexive” bounce in economic activity from the pandemic-induced, government-mandated closures earlier this year. But despite a strong bounce in stock markets from their March 23 lows, true economic activity remains very challenged, and the low-hanging fruit has been harvested. Continued recovery will be much slower and harder won. Illustrating this reality is the second consecutive increase in weekly jobless claims which came in at 1.434 million. I reiterate that this metric had never topped 700,000 at any other time in its pre-covid history… so the current levels are more than twice as high as previous historical peaks.
The preceding all said, and only now do I turn to the Covid-19 data. As noted a few weeks ago, there were the first hints that Covid-19 deaths were beginning to turn higher in the U.S. Since it typically takes many weeks for Covid-19 to progress from infection to death in the unlucky, it is unsurprising that these hints have now become a clear trend. Covid-19 deaths are steadily rising as a lagged reflection of the increasing case counts the past two months. Thankfully, given renewed efforts to control the spread, the new case count appears, for the time being, to have plateaued. Will this plateau persist? As the cooler weather of autumn approaches, I have my doubts. School re-openings will further challenge containment efforts. As might the flu season.
With respect to the flu-season, I will free-think on this topic a little bit. Will there be a severe flu season? Optimistically, I’d speculate not. Whether the U.S. (or Canada or any other nation) is doing all that it could or should to contain the Covid-19 pandemic, it is not the case that these countries are doing nothing. The efforts made to contain the Covid-19 pandemic will surely limit flu transmission as well. Given that the transmissibility of flu [as measured by a metric know as R-0 (pronounced “R-naught”) is less than that observed for Covid-19, these measures might even prove more effective in limiting the spread of flu. In other words, we may, and I sincerely hope, be spared the double-whammy of an all-out flu and covid season (not to mention cold season as well).
To the matter of the U.S. (mis)management of its Covid-19 response, I’ll sadly observe yesterday’s passing of former U.S. Presidential candidate Herman Cain. Mr. Cain chose not to wear a mask while attending President Trump’s June 20th rally in Tulsa, Oklahoma. He was reported diagnosed with Covid-19 on July 2. He passed away yesterday. Obviously any linkage of these events would be speculative at this juncture, but the timeline suggests a linkage is indeed possible. Anyway, enough said.
Lastly, I’d be remiss if I did not comment upon the fact that this economic contraction/recession is not sinking all boats as is typical in most prior recessions. While there are sectors of the economy disproportionately hurt by the nature of the Covid-19 crisis (think airlines, hotels, restaurants, ride sharing etc.), and many more that are challenged but not cataclysmically so, there are still those that are doing almost unimaginably well. Companies such as Apple (owned by discretionary clients), Amazon (owned by discretionary clients) and Facebook (not owned by discretionary clients) all reported earnings yesterday and, in a word, they “crushed” it. All three greatly exceeded both revenue and earnings estimates. These companies are at the forefront of keeping our world connected and functioning and the Covid-19 crisis has accelerated shifts to their platforms. In the early days of the pandemic (and before shutdown measures were enforced), I reduced equity across the board for discretionary clients. By this I mean I reduced holdings in every stock position held. Subsequent defensive measures saw me eliminate certain holdings and sectors entirely owing to my perception that they would be disproportionately hurt by the pandemic (i.e. Canadian energy stocks; Disney, Starbucks etc.). At the same time I chose to retain those that I thought would weather the storm well (notably Apple, Amazon, and Google). But I didn’t add to those positions. In retrospect, I obviously wish I had.
Overall, client positioning remains slightly below neutral the long-term equity target unique to the circumstances of each individual discretionary client. I continue to await a better entry point to add additional equity.
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
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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