To my clients:
It was a down week for North American stock markets with the Canadian TSX falling 0.2%; the U.S. Dow Jones Index falling 0.03% (note the extra zero); and the U.S. S&P 500 falling 0.7%.
Globally, Covid-19 case trends are turning higher. Europe is seeing a surge in cases with France establishing new pandemic highs in daily case counts and other previously hard hit countries like England, Italy and Spain seeing a very notable turn higher in daily case counts also (although still below the peaks at the beginning of the year). India has yet to see any turn lower in its daily case counts and is now knocking on the door of “officially” surpassing 100,000 new cases per day (unofficially I’m sure it did so long ago). Canada – particularly BC, Ontario and Quebec – is also seeing a renewed trend higher.
Focusing upon the U.S. in particular, the turn lower the past handful of weeks appears to have come to an end. More worryingly, the U.S. is entering the colder Autumn months with a level of community spread already at concerning levels with some 40,000 new cases per day being reported (as measured by the most recent 7-day average). I’ve been suggesting to those who have asked that I suspect the next 2 to 8 weeks will be very telling as to how virus trends play out – and I’m not optimistic. I really do think the combination of fomenting school spread (it will take a while for school spread to play out I suspect; hence the 2 to 8 week estimate) and colder weather are not a good combination at all.
The above all said, Covid-19 deaths are proportionately lower than they were in the early days of the pandemic. The older and more vulnerable populations are taking more precautions than the young and healthy. Nonetheless, the potential for spread from those likely to have a better health outcome to those less likely to fare well is a concern that (most) governments around the world remain focused on.
As far as economic repercussions, muting –and perhaps outright reversal – of the recovery seems likely. While there is little appetite for a full return to economic closures, lockdowns and shelter at home mandates, some heightened level of precaution should not be unexpected. These precautions would likely include bar and restaurant closures and restrictions; smaller permitted group gatherings; and school closures among potentially other measures as well. It is these enhanced measures that will likely mute the recovery in the months ahead.
Against this backdrop, the U.S. Federal Reserve continues to be stunningly aggressive in its economic support. The measures taken are historic in their degree and scope, and this week included guidance that interest rates are unlikely to rise before the end of 2023. Such guidance (not quite a pledge, but a strong signal nonetheless) will provide confidence to corporations as they strategically plan their future financing and growth initiatives. The guidance also offers strong support for the stock market in the years ahead if, for no other reason, than investors who rely upon income from their portfolios have little other option than to shift more aggressively toward equities (i.e. stocks) in an effort to generate return. For many such investors, 1% GIC rates (give or take depending upon the term) just don’t cut it. There is an axiom in the investment world that says “Don’t fight the Fed”. The current iteration of the Fed is doing all that it can to ensure this axiom remains relevant.
With respect to portfolio positioning, with the market weakness these past three weeks, I took the opportunity to buy back the half position in Apple shares I sold on August 20th. Said shares are over 20% below their recent peak, and over 10% lower than when I sold them. Could they move lower still? Frankly, yes. But it remains a stellar company with continued strong growth prospects and should do well looking beyond the coming weeks and months.
But really, the above transaction on behalf of clients was simply tweaking the margins of client accounts on a position that had become egregiously overbought; it was not a strategic adjustment. Overall, client equity positioning remains slightly below neutral relative to the targets set in the Investment Policy Statements of individual clients. I’m still awaiting an opportunity to bring this up to a full neutral or perhaps slightly greater than neutral weighting in the days and weeks ahead. Potentially, this strategic adjustment could occur quite soon. However, going to an outright “overweight” equity position is not a development I can rationally contemplate at the present time given the uncertainty represented by the upcoming autumn and winter seasons. Perhaps if stocks sold off to levels approaching the March 23 lows of this year, then maybe. But I don’t realistically expect that scenario to play out either. Not with the support provided by the Fed and the optimism surrounding an eventual vaccine deployment.
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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