MARKetS REPORT – 2020 3rd Quarter
Dear friend,
It has now been more than six months since the World Health Organization declared the global COVID-19 pandemic, upending our home and working lives. As the initial wave of infections subsided and the spread of the virus stabilized through the summer months in most parts of Canada, we adapted to the “new normal.” Heading into the fall, infection rates in some provinces are rising again, raising the possibility of further restrictions to limit the spread of the virus. Amidst the ongoing uncertainty, I hope that you and your family are keeping well.
Capital markets in the third quarter
Recovering from the pandemic-related downdraft of the first quarter, financial markets enjoyed a period of relative calm and optimism through of the summer of 2020. Equity prices in many markets continued to improve, with some sectors moving sharply higher as lockdown restrictions eased and economic activity gradually resumed. Toward the end of the third quarter, however, investor concerns resurfaced. Markets were rattled by growth in the numbers of COVID-19 infections, uncertainty related to the upcoming U.S. presidential election and the expected economic stress of reductions in government supports for businesses and individuals.
Most global equity markets started the quarter positively, led largely by investor optimism for sectors expected to benefit from current conditions, such as technology and health care. The S&P 500 Index, a broad representation of the U.S. equity market, reached an all-time high in early September before volatility resurfaced as the quarter drew to a close. The U.S. index finished the three-month period up 6.6% for the quarter and 8.4% for the year-to-date in Canadian dollar terms. The MSCI World Index, which reflects returns for developed equity markets around the globe, followed a similar path, and was up 5.7% for the quarter and 4.9% for the year-to-date.
In Canada, the S&P/TSX Composite Index also trended higher through much of the summer, buoyed by sectors such as materials (precious metals), industrials (transportation companies) and consumer staples. Despite continued weakness in the energy sector and broader market volatility later in the quarter, the Canadian benchmark finished three-month period with a gain of 4.7% but overall remained down 3.1% for the year-to-date. Oil finished the quarter at $40.22 per barrel (WTI $US) which was up 2.4% from the last quarter end. Gold rallied upward as well, to close on September 30th at $1885.82 $US / oz.
Central banks around the world continued to gauge the ongoing economic impact of the pandemic in setting monetary policy. The U.S. Federal Reserve, for example, noted that the U.S. economy had picked up considerably, but much depends on the confidence of consumers to spend. The U.S. central bank indicated that it would allow inflation to exceed 2% as the economy recovers and that its target interest rate would be left unchanged at 0% to 0.25% for “an extended period.” The Bank of Canada also kept its benchmark interest rate steady during the third quarter at 0.25% and said it would continue its large-scale government bond purchase program designed to promote liquidity in the financial system. Canadian government bond markets didn’t move much during the last 3 months. The 10 year Canada govt. bond yield was 0.56% and the 30 year Canada govt. bond yield was 1.11% at the end of September.
What can we expect now?
So far, 2020 has reminded us of several important lessons, one of which is that timing the market is nearly impossible. Many people would have sold their investments shortly after the U.S. market declined nearly 34% in March, believing that a recovery would be a long way off. But from its lowest point on March 23, the S&P 500 took just 140 days to recover – the fastest rebound on record. Those who stayed invested would likely have been rewarded for their patience, while those who sold during the downturn in March would have locked in losses. Again, some industries have accelerated the changes that we are likely to see long term. Our dependence on fossil fuels has decreased and the transformation in the digital economy (like payment systems and virtual meetings) has increased. So, as the picture below illustrates, what seemed like disaster may just have a silver lining to it (pardon the obvious visual pun).
Looking ahead, the COVID-19 pandemic is far from over and will likely have an impact on global investment markets for months to come. Governments and central banks around the world continue to provide support for their economies through accommodative fiscal and monetary policies. Here in Canada, more income relief is in sight with the federal government’s announcement on September 24th of Bill C-2, which should pass approval in the House of Commons and the Senate. More details can be found here: https://www.canada.ca/en/employment-social-development/news/2020/09/x3.html
But the economic outlook remains cloudy, particularly if further restrictions to limit the spread of the virus become necessary. For this reason alone, keeping a long-term view will be especially important.
In addition to COVID-19 concerns, the political drama in the U.S. is also adding to market volatility. Polls are indicating a Democratic president is likely, but polls have been wrong far too often to take anything for granted. The final results will be likely determined on which party can beat their drums loud enough to get their own members and a majority of independents out to vote in person or via a mail in ballot. I have read multiple analysts takes on sectors and companies that will continue to benefit with a Trump administration and those that will likely be better off under a Biden administration. If you wish me to share those analyst’s summaries with you I would be happy to, however you will have to provide the grain of salt.
In addition to sectors and certain companies finding benefit in one particular result, there is also a pattern that is known as the “presidential cycle”. The data shows that the last two years of a president’s term tend to show above-average returns, and the first two years tend to be below average. The theory is that it takes a little while for the president’s new agenda to work its way through the economy, and then the last two years tend to be stimulus-driven (both fiscal and monetary stimulus) as the incumbent seeks re-election.
In the last 15 years, however, this correlation has weakened, for the following reasons:
· The market increasingly discounts this news fast.
· There might be another consequential driver to markets, namely the economy.
I know there is uncertainty right now. The stock markets do not like uncertainty. However, once the result is in, the “fog will be lifted,” and we could see higher returns because there is more certainty. And, just because the election is dominating the news cycle right now, it should not be the dominant influential factor in a portfolio. It’s important for all investors to take a step back and not build their portfolios around one election.
In closing, I would like to remind you that my team and I are here to help. Should you have any questions regarding your portfolio, please do not hesitate to contact my office.