Market View

Quarter 3, 2020

What WorkedWhat Didn't
Gold and Mining StocksCannabis Stocks
Preferred SharesOil Stocks
Utilities StocksU.S. Bank Stocks
Equity MarketsSecond Quarter % Change (in Cdn$)Third Quarter % Change (in Cdn$)
S&P/TSX Composite17.0%4.7%
S&P 50016.4%6.8%
MSCI/EAFE10.2%2.9%
MSCI/EM13.2%7.6%
TSX Energy10.9%-8.1%
TSX Financials6.2%4.0%
Bond MarketsSecond Quarter % Change (in Cdn$)Third Quarter % Change (in Cdn$)
FTSE Canada Universe Bond Index5.9%0.4%

October 2020

We have reached the time of year of Autumn harvests. Assuredly, our gardens’ best days are behind and daily temperatures will undoubtedly decline. However, unlike the certainty inherent in the change of seasons, there is a significant unknown on the horizon that will affect the investment markets. We are not talking about the U.S. election. We are referring to the development and approval of a vaccine for preventing the COVID 19 virus.

This global pandemic has resulted in both significant supply and demand destruction. As a response, Central Banks around the world have lowered interest rates to levels not seen in our lifetimes and governments have pushed through massive spending and support programs. The offshoot from low interest rates is that there are few places to put money in order to make a reasonable return other than in the equity markets. 10 year government bonds yield an unappealing 0.5%. Even the spread between high-yield (risky) bonds and high-quality bonds leaves very little extra return to compensate investors for their higher level of risk. 

Interest rates this low raise the question of ‘what would you rather’: invest your dollars you have today at miniscule interest rates, or have a chance at earning more dollars sometime in the future through other forms of investments? With almost nothing to be missed by not getting that mere dollar of interest today, investors choose to defer the dollars they earn to later. This combined with epic government policy stimulus has benefitted a small number of growth stocks as growth in the future becomes more highly valued than income today. The growth companies are not only benefitting from the government stimulus policies and low interest rates but also because the stay at home trend has boosted earnings for some (in particular, for large technology companies).  This causes us to wonder about possible scenarios that could trip up this preference for growth stocks.

What would happen if announcements were made to suggest a highly effective vaccine has been developed? There are companies too numerous to mention that are involved in this quest so it’s not a rhetorical question. All of a sudden the investing landscape would shift. Interest rates would no longer be anchored and economic forecasts for the future would start to rise. Growth stocks would begin to lose their luster. This is especially true given growth companies are starting from lofty price to earnings valuations as higher interest rates work as gravity upon stock valuations.

Current low interest rates encourage risky behaviour as there is no penalty for failure. Why not “roll the dice” because debt repayments are negligible? And, hey, if payments can’t be made, for now, the government and the banking system seem prepared to grant a debt deferral in the name of COVID. But a stronger economy and the promise that further waves of COVID would not descend on businesses due to an effective vaccine would result in waning patience for debt repayment deferral. Open ended policy support by governments (themselves heaped with COVID induced debt) would no longer be available to prop up the markets. Cyclical stocks depending on economic growth and companies that have a more modest growth profile would come back into focus. Valuations would begin to matter again as would healthy corporate balance sheets and low debt levels. Wealth redistribution would transition to wealth creation, a far healthier economic scenario.

Discovering an effective vaccine is one feat but manufacturing it and providing the appropriate infrastructure to distribute and administer it to enough people to provide immunity will take time. However, the market won’t wait for the economy to recover; it will assume recovery is coming, and probably sooner than it will be. This will likely create havoc for expensive stocks (high price to earnings ratios) nonetheless. 

We just laid out an alternative scenario that could change the investing climate quite markedly. Too bad no one knows when or how quickly it will come to pass. Science does not keep to a deadline. If there is no effective vaccine found, then economic growth will remain muted and the status quo will continue i.e. low interest rates, penchant for debt and preference for future growth. Think of a child’s teeter totter: positioning yourself at the fulcrum with groupings of stocks on both sides to minimize a portfolio’s volatility. On the one end, there is investing in companies that are not heavily dependent on low interest rates, government stimulus policies or hoped for growth many years into the future (think cyclicals, industrials and financials). The opposite end contains companies that are being valued for having growth potential farther into the future like technology and biotechnology. Expensive stocks will be vulnerable if a vaccine is discovered but timing is unknown.

So, while there are a lot of unknowns, the secret is there always are. We have been managing investments for a very long time, a collective 100+ years, and over the long haul we have weathered a variety of uncertain and unappealing investment environments. Just like those Autumn corn mazes: You know you will find the way out; you just don’t know when or which path will lead you home.

Fixed Income  September 2020  June 2020
Cdn 91 day T-Bills 0.10% 0.21%
U.S. 91 day T-Bills 0.10% 0.15%
Cdn 10 year Bond 0.54% 0.51%
U.S. 10 year Bond 0.69% 0.64%
Commodities (in U.S.$)  September 2020  June 2020
Oil 40.22 39.70
Natural Gas 2.53 1.71
Gold 1895.50 1781.20
Currency  September 2020 June 2020
Cdn/USD 1.3321 1.3573
Cdn/Eur 1.5615  1.5246