To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 4.5%; the U.S. Dow Jones Index up 6.9%; and the U.S. S&P 500 up 7.3%.
It’s been a very busy week on the news front but, unfortunately, I’m pressed for time to adequately address all the issues. So, it will be point form again this week:
- As all will surely know, the U.S. election has yet to produce a winner. But Democrat Joe Biden is clearly the front runner at this late stage. His paths to victory are many, while incumbent Donald Trump all but needs to sweep the remaining undecided states.
- As written in both last week’s update and my quarterly letter to discretionary clients, I viewed a contested election outcome as a probability, not just a possibility. Clearly this is playing out as Trump has launched multiple lawsuits in multiple states trying to stop counting while he still leads in those jurisdictions (as of this morning, he no longer leads in many of these states). I’d not expect resolution any time soon.
- Despite the uncertainty engendered by these developments, equity (i.e. stock) markets had a stunningly strong week.
- One reason for the market strength appears to be that the U.S. Congress looks to remain split. The Senate looks as though it will be retained by the Republicans, whereas the House of Representatives looks set to be retained by the Democrats. A split Congress is a natural brake on the more radical impulses of whichever party takes the White House. Middle of the road policy tends to be appreciated by stock markets.
- U.S. Federal Reserve Chairman Jerome Powell pledged that the Fed would continue to be aggressive in supporting markets. However, he did express continued caution is warranted on the Covid-19 front.
- On the Covid front, the numbers are now growing at an exponential rate. The U.S. reported back to back days (Wednesday and Thursday) of over 100,000 new cases. It almost certainly will again today. European countries broadly are reporting record case counts. Canada is reporting record counts. So too is B.C. (over 400 cases reported yesterday). Hospitalizations are now rising. Deaths should begin notably increasing as soon as next week. Whether or not there are mandated lockdowns forthcoming in the U.S. or Canada, I do believe there will be a slowdown in consumer participation as the numbers inevitably get worse over the coming months of colder weather and holiday gatherings.
- While Covid cases are increasing dramatically, and markets may not be appropriately discounting potential economic slowdown as a result, it is also the case that we continue to get closer to a vaccine by the day. There is a very natural push and pull at play between these two forces.
- Despite an exponential increase in cases, and a looming increase in deaths, it is undeniable that the economic data in the here and now has remained strong and has certainly been better than I had anticipated. The ISM Manufacturing Index came in at a very strong 59.3; the ISM Services missed expectations and decreased from the prior moth’s reading, but still posted a respectable 56.6. And 638,000 new jobs were created in the U.S. in the month of October. Again, solid numbers across the board. I would be VERY surprised if this strength persists through November given the burgeoning Covid concerns.
- While a small position in Visa stock was added to portfolios last week, portfolio equity positioning continues to remain ever so slightly less than neutral (i.e. just under the long-term equity target set in client Investment Policy Statements). I should add that there is a roughly 5% position in gold bullion. This position is as large as I intend and will not be added to. It has been added as a portfolio hedge as well as a possible asset class beneficiary in a world running deficit spending at unprecedented levels. Returning to equities, I’ll use future market pullbacks to bring positioning to a full neutral, perhaps slightly greater than neutral stance. But an outright overweight positioning in equities is not currently contemplated. I reiterate that I don’t believe markets are appropriately discounting the threat posed by the exponential increase in Covid cases occurring globally.
That’s it for this week. All the best, and please 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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