Market View

Quarter 2, 2020

What WorkedWhat Didn't
Gold StocksUtilities Stocks
Technology StocksBank Stocks
Momentum StocksHong Kong Stocks
Equity MarketsFirst Quarter % Change (in Cdn$)Second Quarter % Change (in Cdn$)
S&P/TSX Composite-20.9%17.0%
S&P 500-11.8%16.4%
MSCI/EAFE-15.2%10.2%
MSCI/EM-16.1%13.2%
TSX Energy-37.2%10.9%
TSX Financials-21.1%6.2%
Bond MarketsFirst Quarter % Change (in Cdn$)Second Quarter % Change (in Cdn$)
FTSE Canada Universe Bond Index1.6%5.9%

July 2020

Well, the first six months of 2020 have certainly not been dull. If on January 1, 2020 a market commentator had predicted the Dow Jones Industrial Index would be down 9.3% at the end of June, that would not have elicited much excitement. However, if said commentator had predicted a plunge of 34.9% from February 20 through March 20 and a subsequent ascent of 34.6%, his writings would likely have been ridiculed. Of course, that was before the COVID 19 pandemic arrived in North America.

Looking inside the equity markets, one of the trends evident in 2019 has continued in 2020, that being the relative strength of the high-tech area at the expense of “traditional” industries. The similarities to the 1998 – 2000 period are both strong and a cause for worry given the violent end to that bubble. 

The coming months and years are, as per usual, as clear as mud. On one hand, some of the strength in tech shares can be explained by strong corporate results and partly by the changes forced onto society by the COVID 19 pandemic. But the worry is that by traditional measures most of that industry group is overvalued and vulnerable to a correction, perhaps a significant one. Caution is warranted, as we also feel that the market has been strong, mostly on the back of the US Fed throwing money at investors through the banks and that cannot go on forever. Add in the uncertainty of the “second wave” and markets should correct. Of course, now would be a good time to remind readers of that old Keynesian quote that “the market can stay irrational longer than you can stay solvent”.

To change course a little bit, one of the major trends in North America over the last 39 years has been the ongoing decline of interest rates. Investors have benefitted from that move as prices of both equities and fixed income securities have trended higher as the gravitational power of interest rates has fallen. With rates now at historic lows and seemingly unable to go much lower, that benefit will be removed from the markets in the future. It also means that a re-evaluation of the traditional roles bestowed on equities and fixed income securities is in order. We have traditionally managed the majority of our client portfolios in a balanced manner, meaning holding equities leavened with some more stable and income producing bonds, debentures and preferred shares. With the income yields of fixed income securities returning very little at todays’ rates, the question then becomes where and how does an investor who needs income find it? We feel the most logical answer is in high yielding common shares (equities) of well funded businesses in stable industries. In English that means investing in the common shares of companies such as BCE (dividend yield of 5.9% at June 30), Emera (5.0%), Enbridge (7.9%) in Canada and Truist Financial (4.7%) outside of Canada. In addition, we may also dedicate some fixed income capital to preferred shares. Their yield is much higher than available in bonds, but that market can be both fairly illiquid and volatile.

Given the above, we would expect to gradually adjust our balanced portfolios to de-emphasize the Fixed Income area in favour of additional cash reserves (as the income forgone is minimal) and an increased position in high yielding common shares. The result will be a modestly higher income rate with an expectation of a rising income return over time. It will also mean some added volatility but as long-term investors we feel the trade off is warranted and would be happy to discuss any and all aspects with you, should you have any questions or concerns.

Fixed Income  June 2020  March 2020
Cdn 91 day T-Bills 0.21% 0.23%
U.S. 91 day T-Bills 0.15% 0.09%
Cdn 10 year Bond 0.51% 0.75%
U.S. 10 year Bond 0.64% 0.70%
Commodities (in U.S.$)  June 2020  March 2020
Oil 39.70 20.48
Natural Gas 1.71 1.64
Gold 1781.20 1596.60
Currency  June 2020 March 2020
Cdn/USD 1.3573 1.4068
Cdn/Eur 1.5246  1.5520