Turning to the markets, global indices marched higher over the past week, in a shortened week for the U.S. markets. Many stock markets are approaching the peaks reached at the beginning of the year. Investors have grown more comfortable with the possibility that life - and the economy and earnings - will return back to normal once vaccines become widely available in the second half of next year, a view point that we have been discussing for a number of weeks now. This has helped to offset near-term concerns with respect to the pandemic. Below, we will quickly comment on an interesting chart that I came across this week. We discuss the cash hoard that some companies have been building throughout the crisis, finally we touch on the Canadian banks, whom are reporting results over the next week.

Cash slowly coming back into the market?

I have commented on numerous occasions why I believe elevated cash balances that were built up in the early days of the pandemic will eventually act as a tailwind for stocks. As uncertainty is beginning to fade investors are becoming more comfortable putting money back into the markets. To be clear, we still have a long way to go. A look at the chart below illustrates that 14 of the past 15 week’s U.S. money market funds have seen net-outflows.

U.S. money-market assets hit a record $4.8 trillion. That pile has since shrunk to roughly $4.3 trillion -- still well above pre-virus levels.

U.S. stocks have been hit with one of the largest deluges of cash ever recorded, attracting $53 billion thus far in November. November is on pace for one of the strongest months in two decades. With mountains of cash still parked in money market funds we believe this “unwind” could continue for years.

Dividend Watchers – Remember when investors worried about dividend cuts?

There was an interesting article in the WSJ this week that talked about how COVID-19 spurred companies to hoard cash. Now some of these companies are starting to dole out that cash hoard. There were 42 companies in the S&P 500 that cut/suspended dividend payments during the crisis to preserve cash. It is a healthy sign that we are beginning to see some of these companies reinstate their dividend, such as retailer Kohl’s. The move signals that many executives believe the pandemic could be behind us soon. Of the 42 companies in the S&P 500 index that suspended their dividend earlier this year, six have resumed paying their dividend and several more have given a timeline to do the same, according to S&P Dow Jones Indices.

Other companies that find themselves flush with cash are returning it to shareholders in other ways – Costco a name we own in our equity model, and a company I can talk about at length (as many of you have already had to endure) announced it plans to pay a special dividend of $10/share this year. Thank you Costco!

Banks – worst case scenario averted

The Canadian banks are set to report results over the next week. Like the broader market, they have surged higher of late. This has been a welcome development given the group had struggled up until recently, weighed down by concerns over potential credit losses stemming from business closures and high levels of unemployment. But, the banks have spent months setting aside billions of dollars known as provisions to prepare for any future loan losses. Furthermore, the substantial aid that the federal government has put in place has delayed, if not reduced, the amount of losses that banks have dealt with. Moreover, an improving economy in the second half of 2021, should it materialize, will act as a tailwind and may even allow them to release some of the capital they have set aside, benefitting earnings to some extent. Yet, we still expect challenges in the years ahead because of a lack of revenue growth as ultra-low interest rates have left net interesting margins - a key source of profitability for banks - with little room to expand. Despite the outlook for lackluster earnings growth, we believe a worst case scenario – significant credit losses – has largely been averted.

We have grown more confident in an eventual return to the life we knew. But this view appears to be shared by many given how well markets have done of late. The optimism is encouraging to see in light of the environment, but it is important to remain level-headed, disciplined, and focus on our long-term investment plan.

We are here to help

It has been great speaking with everyone throughout the year and getting to know everyone better. Unfortunately COVID-19 has really limited our ability to meet with clients face to face, with any luck 2021 will allow for more of that.

As always, if you have any questions or concerns, please contact us. Our entire team is available to listen and speak to you. We are also available to speak to family members or friends who might like to be reassured.