Welcome, everyone, to our video recording and market update. We are so pleased to have Jim Allworth here with us today. Jim is the Portfolio Strategist from RBC Dominion Securities. Thank you for being here, Jim.
My pleasure, Danielle.
Some of our clients may have seen you speak in the past, but for those who haven't, Jim has been in the investment industry for over 50 years, both as a research analyst and portfolio strategist. He's been with RBC for over four decades now, I believe. And in Jim's main role as our investment strategist is, of course, to develop a strategic view about the expected direction for major financial market. So welcome, Jim. And we've invited him here today to share all of his thoughts with all of you.
So, Jim, let's dig into it. You've seen a lot of different market conditions in past recessions. And as portfolio managers we're used to looking at a number of different economic variables to predict the condition for markets. But in this case, we've had also pay close attention to the case numbers globally for COVID-19, and also the progression and spread of the virus. It's led a lot of people to say this recession is different.
Can you comment on that? Like what does history tell us? And how does the virus itself impact, or does it, the way that we should be evaluating businesses that we're investing in? So where are we now?
Sure. Well, I think the most important difference to begin with is that this is a recession that arrived in an unconventional way, very unconventional way. Virtually every recession prior to that had been the result of the arrival of tight money and tight credit conditions, interest rates that were high enough that they were slowing the economy down. And that has always been our principal focus.
Our investment stance is pretty simple. Stay invested in equities until you see a recession on the horizon. And we watched many things to see the arrival of recessions. And while they were a lot closer to signaling a recession was coming than they had been any time in the last decade, they really were not yet saying a recession was coming. So it's COVID that gave it to us.
The other side of that is that we weren't in the tight money position and the Fed recognizing that panic was about to seize up financial markets stepped in and removed that risk. So we've never had tight credit in this at all.
And that would normally, if you didn't have tight credit, would probably mean that a recession would be shallower or not last as long as most. But it remains to be seen in this case. So it's definitely different, right? And as you say, we're focused on the number of cases that are out there. And I think, first of all, it's worth remembering that this has all happened very, very quickly.
And it might go on happening quickly. That is to say, all the developments in this might just all be coming at us rapidly week by week and month by month. So in January and February, COVID was no issue. It was a problem for the Chinese, everyone else's problem.
And then when it arrived and we acknowledged that it arrived, then we had to go and listen to the scientists who said this thing is going to take off, and it might be dangerous in taking off, and that it might overwhelm the health care services. But whether we do something about it and try and slow it down or whether we just let it run, the chances are the number of cases are going to peak somewhere in April and May. And they're then going to start turning down. And as they turn down, people are going to think more aggressively about reopening economies and getting the economy back to normal, if possible.
And in fact, that is what happened. In most places, the number of new cases peaked in March and April. And some have had problems since, but most have not. And the number of new cases have been falling steadily ever since. And the number of people in hospital and in intensive care in hospital has been falling even faster. And the number of deaths have been going down.
And yes, the talk about reopening economies has gone beyond talking and many economies in North America and in Europe have reopened, partially, perhaps, but on a road towards becoming more normal. Well, if you looked at the trajectory of the economy in all this, the second quarter was terrible. And it was terrible because the economy had been shut down.
And the economy in the third quarter will be better because the economy is reopening. The question is what happens after that. And there are people out there who think this is a V shape and that it's not going to be stopped, that we're just going to see a steady progression in improvement of the economy, and it's going to be rapid.
And there are others who think that there's much worse to come, that the economy is going to fade again and head down into something more difficult. And there's probably where we are, which is we think the economy is going to keep improving, but it's not going to be comfortable. So [AUDIO OUT] steps forward, one or two steps back. And give you concern from time to time. And we think that's highly likely.
But I think this is a time to remind ourselves of some history because there is a lot of history to this.
And we've lived through probably 120 years at least of pretty reliable historical data that we have to go back and look at. And over that 120 years, there have been a whole variety of things from pandemics, of which there have been quite a number. World wars, lesser wars that were still important-- Korea, for example. Vietnam, et cetera. Financial crises, nuclear disasters, all manner of things, and each one of those things at the time they were happening made people say, oh, my gosh, the world is changing for the worse and it's never going to get better.
And the victim of that was very often stock prices, which went down as if there was no future coming that was worth having. And that was always the wrong view to have. The economy in all cases recovered and recovered faster than people understand. And I don't want to take too long at this, but I'll mention two that come to mind right away.
The first one is the Spanish Flu. And I'll mention it because it was a pandemic. It follows on the heels of World War I. It was infinitely worse than this one. It killed 40 million people worldwide before it was done.
People it killed were largely young adults between the ages of 18 and 35, unlike today's which preys on older people. And that was following on the heels of World War I, which had killed the same age group in the tens of millions. So if you were sitting there in 1920, you could have been forgiven if you came to the conclusion that having seen all these young adults massacred in two fell swoops that the economy would be a long time recovering.
And you would have been dead wrong, because a year and a half later the economy was running, and running hard, and went on running hard right through the 1920s. And the thing that ended all that, of course, was the stock market crash and The Depression. And I'm going to talk about The Depression for a moment because the word depression has come up in all this. Because as the market was sinking and the economy was sinking, people were worried that we were headed into a depression.
Well, one of the reasons they were worried about it was that in their minds The Depression was something that lasted for a very, very long time. Here's what people think. If you ask the average person what happened in The Depression, this is what they'll say-- even people who lived through it, this is what they'll say. They'll say, well, the stock market collapsed at the end of '29 and right after that the economy collapsed all through 1930, '31, and '32.
And then after it collapsed, it just lay there on the ground on its back and didn't move all through the dirty '30s. And then, finally, World War II came along and World War II pulled the economy back into good health. And all that middle part is just completely wrong. The economy did collapse in 1930, '31, '32 dramatically. But it didn't just lie there.
Starting in 1933, but more forcefully in 1934, it started growing again. In 1934, the US economy grew by 16% in one year. In the next year, it grew by about 14%. In the year after that, it grew at around 11%, the year after that, around 9%. All of them, very high growth rates. And it would have gone on growing beyond 1937 except that the US Congress lost its nerve, and it put in a tax increase to try and eliminate its deficit in one fell swoop, and it sent the economy right back into the ditch in 1938, and the stock market fell in half again.
But it didn't just lie there waiting for World War II to come along. It, in fact, started growing again in '39, and '40, and '41. And remember, the Americans didn't even get into the war till the end of 1941. And long before that, the economy was growing rapidly.
So what it tells you is that the recession-- the Great Depression is exactly like every other one of these events that I talked about in the last 100 years. When it was over, it was over. And once the economy responded to the availability of low cost credit like it always had and started growing again, and quite quickly was growing at a rapid rate. So whatever happens in this, when this is over, it's going to be over. And the economy will come back and be growing at a potential rate.
I'm not saying the economy will look the same. There's plenty of parts of the economy that have signaled that they're in long-term trouble. And there's plenty of parts of the economy that say that they offer great long-term potential. And there will be a changing of the guard and there will be some businesses that do not make it through this in the form they were in before. And I understand that. But the economy itself will be growing and there will be opportunity in it. And if the economy is growing, corporate earnings will be growing. And if corporate earnings are growing, then in our view, share prices on balance will be rising.
So this is different in terms of how it arrived. It might be different in how we come out of it, but it's likely not to be different once we're past it. And we'll be past it at some point. So the virus can keep throwing curveballs at us, but so far it's throwing nice, soft lobs at us.
We've got the death rate down. We've got at least two therapies out there, not counting vaccines that are working. We have one that cut the average hospital stay by someone who has to be-- anyone who had to be hospitalized, if they received this drug for five days, their hospital stay was cut by 30% in length, which is huge if what you're trying to do is make sure your system doesn't blow up on you.
And laterally, that same therapy, by the way, has shown that it actually reduces mortality rates as well hospital stay length. And then another therapy came along, which was a steroid that has been around and used since the 1960s, so we know-- and widely used, so we know it's safe. And it has actually reduced mortality of people who are in hospital by about 30%, which is huge.
And now we have 138 different vaccines, at least, under development. And three or four of them showing quite promising early results. One of them that's being developed by AstraZeneca in Europe might be available for getting approvals as early as September or October. And the developers of that say that the results in early trials are very promising.
The other two are, or two of the others are also being developed by major pharmaceutical companies, one by J&J, and one by Pfizer. And the importance of having an AstraZeneca, Pfizer, and the J&J involved is that not only do they have the funds to keep this drug going, but they've all committed to pre-building out the manufacturing capabilities, so on the day they get approvals, they will actually have doses that have been manufactured, not just in the millions, but in almost three cases, in the billions, which will be available very quickly. So this is a big, right?
And then there's just the fact that the virus itself has weakened, if you like, over [AUDIO OUT]. And we've seen this from three major sources. Italy, which was one of the biggest hot spots going, and New York, an especially the New York City area, where health authorities have essentially said that the virus is not the virus it was a month ago, two months ago, or four months ago. That the number of hospitalizations is down a long way, but more importantly, of the number of people being hospitalized, the proportion requiring intensive care or ventilation has dropped even further.
And so all these things suggest that we're right to expect that when this is over, it's going to be over. And it's reasonable to expect it can be over later this year or next year. Well, that leaves a road clear for the economy to recover. How it recovers and how fast it recovers remains an open question.
Our own view is that we won't-- the economy won't get back to where it was when all this started much before the early part of 2022. And it won't get back to its old trajectory. In other words, where it would have been if none of this had happened and it just kept motoring along with the way it had been, it won't get back to that until 2023.
But if you're going to wait until everything is back to where it was, clearly the market is not waiting and the market has moved forward here. So to me, this is-- yes, every recession is different, but one of the things they all share is that once they're ended, it's wrong to expect-- look at-- think of the financial crisis. Think of the people who were scared skinny in the financial crisis. I'll put my hand up. I was.
But staying scared was a mistake. And people waited for years, thinking that what the financial crisis had signaled is something even worse was around the corner. And in doing so, many of them missed a good part of what was the longest economic expansion and longest bull market in history. And I think taking that kind of an extreme negative approach is a big mistake. And being invested is important. Being invested sensibly is also important.
Maybe to build off of about how to be invested sensibly right now, one of the things that you mentioned too is just some of the changes that COVID-19 has brought on to the business environment. We've certainly seen how individual companies have-- some of them have been able to adapt and change to the new environment better than others. And part of that has been a real disparity in how growth stocks have done relative to the more conventional dividend blue chip oriented stocks.
If we look at major market indices, we can see that difference. The more growth oriented NASDAQ is up here today at about 19%. In contrast, the Dow Jones industrial average remains down, kind of in the 5% to 6% range. And I think for us as portfolio managers, a lot of our clients need income from the portfolio or they'll eventually need income from the portfolio. So it seems inappropriate to only buy growth stocks, especially given the valuation differences that have happened.
So our solution's been sort of a barbell approach where we've got dividend oriented stocks, but we've also integrated some growth stocks. Can you comment on what this has done to what companies are leading the pack and that positioning?
Sure. There's a lot of ways to approach this. But there's a lot of data out there that shows that in the long run, dividend paying stocks do better than stocks that don't pay dividends, in the long run. And that companies that have growing dividends do even better than stocks that just pay dividends. And that the stocks that do worse are the ones that cut dividends or eliminate your dividends. So there seems to be a balance that says dividends are a good thing.
Let's imagine for a moment that you're in a world where companies don't pay dividends. They never have. They don't do that. Then, in order to get income if you own those businesses, you'd have to sell some stock every year. And because everyone did that, it wouldn't seem abnormal, right? At the moment, it seems abnormal. Right?
So there's-- a lot of this a state of mind and psychology. It's up here in how you think about it. What I care about, I would prefer a company that pays dividends. I like that commitment. But what I really care about is that a company can pay dividends. That it's generating inside its business more cash flow than it needs to keep its business running and growing. After it's built its new plant, or whatever it's going to do, and repaired all its machinery, and given everyone a raise, and all the rest inside the business, there's still enough cash flow available to pay a dividend.
If it chooses not to because it sees such great growth opportunities that it wants to keep investing inside the business at its high internal rate of return, so be it. But I need to know that it's got the potential to pay dividends. And looked at the other way, I don't want a company that just pays dividends, but doesn't have the money to do it. And there are companies that are borrowing money in order to keep their dividend. And I'd rather not be there.
I want somebody whose earnings prospects justify my confidence. And I prefer some to come as dividends, but I don't have to have it coming as some of those dividends. I think your approach gets you there. Because, in fact, I'm sure that in the companies that you've got that are paying dividend, they're still quite good companies that have good prospects, and [AUDIO OUT].
And so I have no problem having the combination of some yield and lesser yield. What I'd like to think is that I could look at all those businesses three, four, or five years down the road and see, given from how they're performing now that they're going to have even more earnings available to pay out in dividends down the road. That's, to me, the ideal.
Yeah, I think that definitely connects with how we've been looking at the businesses that we've been owning. And just I think with COVID, an opportunity too to increase quality in the companies that we own, and making sure that everybody we've got on the balance sheet has good cash flow and good prospects for the future. So alignment there.
Maybe to kind of go back to something you mentioned earlier, which is this recession didn't come as a result of a breakdown in credit markets, in large part because of the stimulus that came out from governments. And it's hard not to worry a bit about what that government debt load looks like in the future. I think in Canada right now we're sitting to project about a $340 billion deficit this year. What does the increased debt load mean for our future? And is it really a problem for another day?
Oh, don't be such a worrywart, Danielle.
Yes, well, if it is a problem, it's a problem for another day. It's not a problem today. That is to say, government-- I'm not talking about government debt. The debt that's been taken on to bring us out of this an to some extent corporate debt, too. I don't believe it's a problem in the short run. And the problem in the long run to an extent that it's probably less than I think people understand.
Here's one of the reasons why. One of the reasons why is that everybody is doing it. This isn't a case of-- if it was Canada or Spain that found themselves in some economic pickle, it was a real problem for them. And their way of getting out of it was to just go crazy, and borrow money, and pour it into their own economy to try and get them out of the difficulties they were in.
Then other people around the world would take a look at that and say, uh-oh, they really are having trouble and they want to borrow our money to get out of it. I think we're going to demand a higher rate from them and our interest rates would go up. And people would lose confidence in our currency. And our currency would be dropping. And we'd be in a full-scale crisis.
That's just not true for us, or for Spain, or for anybody else because absolutely everyone is doing it. You can take whatever billions that we're doing and compare it to the size of our economy, and then go take the billions that the US and everyone else is doing and compare it to the size of their economy, and essentially we're doing about what they're doing. So I don't see that as a problem.
The second problem is that people imagine somehow or other that governments are like households. And to use the common phrase, they have to take care of their financial affairs the same way. Well, a lot of that is, again, just psychology.
Canadians are culturally thrifty people. We're not as thrifty as people in Japan or people in China, who save 30% of their income, but we're thrifty people. And we generally have always viewed things like mortgages as some sort of a necessary evil that we have to take on to buy a house when we were young, but we certainly intended to pay that mortgage off. I have to tell you there's lots of people around the world who don't share that view and have not been in trouble because they didn't share that view.
Americans look, and talk, and sound a lot like us, but I haven't met very many American colleagues who haven't felt the need to pay off their mortgage. Remember, they get 30-year mortgages down there at the fixed rate and they can always renegotiate if they choose to. And if they can get a rate that's low enough, they put the pin in, and they got that payment for 30 years, and they're fine with that. That doesn't seem to be our mentality.
So governments are not like people. They don't depart this world. They don't have to get their affairs in order before they leave. There's always a new taxpayer coming along. And assuming they can manage their economies reasonably, they can go on doing that indefinitely. And I frankly think Canada is in better shape than a great many countries to do that. Mainly because we were in a much stronger shape, certainly federally, an even provincially, our finances were in much better shape than every developed country, but Germany, going into this.
So I'm-- I find it hard to ring my hands and worry about it in a dramatic way. The issue out there, I think, that could have an impact if it's not managed properly, and it's not so much our ability to pay or service the debt, it's whether we are disciplined in the way we do things beyond that. And the way that could show up would be inflation down the road. And that's certainly not [AUDIO OUT] be in the near term at all, but it could be down the road.
Because we have engaged in money printing here, much more so than we did after the financial crisis. And too much money, if it's chasing too few goods, gives you inflation. That's the classic definition of inflation coined by Milton Friedman. He won a Nobel Prize for it. Inflation, he said, is always the result of too much money chasing too few goods.
We've got, arguably, too much money. Governments have printed huge amounts of money to stave off this COVID crisis. What we don't have is too few goods. There's excess across every industry around the world. Before we're going to get inflation as a result of all this, we're going to have to have that excess capacity used up. That's going to take at least two years, much more likely three or four years.
So if inflation is something that could be a problem, it's a problem for a number of years down the road. And I don't think is worth concerning ourselves about right now in terms of the way we invest.
I think-- thanks, Jim, for that. And we're getting close to time to wrap up. I'll maybe ask you one more quick question and then get your final thoughts. But I couldn't depart without talking a little bit about the US presidential election coming up this fall.
Originally, the polls were indicating that Trump would get a second term. It's now shifted where now it's looking more likely that the Democrats get in. Can you comment on the impact that either one would have on markets? It certainly connects to the idea of potentially more debt, higher taxes, depending on either outcome. What are your thoughts?
Well, in my long term-- I think the long-term impact is not big. The short-term impact conceivably could be. There's an old saying out there that the market doesn't like it if somebody wins. And winning in this case is defined as somebody sweeping to victory. So if Biden wins the presidency and the Democrats keep Congress, keep the House, and take over the Senate, then I don't think the market would like that.
And if the opinion polls, which are kind of showing that right now, persistent showing that after the conventions, then I think the market would find that as perhaps an excuse to pause for a while. And if that actually happened, I think on the next day the market wouldn't like it and it probably wouldn't like it for a few months thereafter.
If the Republicans swept, the market would probably be happier for a while because an awful lot of guys on Wall Street are Republican enough. A lot of CEOs are Republican. And they somehow or other [AUDIO OUT] are going to avoid-- that if the Republicans got in, they wouldn't get higher corporate taxes, and they wouldn't get a wealth tax. But I think a few months down the road, they would change their mind about that because they'd start seeing that a government that can do anything it wants might actually do that. And that's what they don't like. They like gridlock.
So I think either party sweeping could potentially have some negative impact on the market, but I hasten to say I think that negative impact would have run its course within a year. That of all this stuff, all the worries about virus, all the worries about elections, all the rest of it, are small potatoes compared to the credit cycle and compared to the long-term re-emergence of the things that drive share prices and corporate values higher, which is the growth in global population, the growth and prosperity, and the growth in productivity, a factor really since the Industrial Revolution began.
So I'm a-- I remain resolutely long-term optimistic. I'll take my comings and goings in the short term and know that I can't predict them. But I believe focusing on finding great businesses whose future prospects look good is the way to approach this.
OK. Thanks so much, Jim. We're basically at time. But thank you so much for your time. And thank you to all of you. And we'll check in later. Thanks, Jim.
Thanks, Danielle. It was my pleasure.
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