MARKetS REPORT Q2 2020
Just when the caterpillar thought the world was over, it became a butterfly.
Zen proverb
Dear Client,
I hope that you, your family, friends and your loved ones remain well during this unprecedented time. After a truly unique quarter for capital markets, I am writing to provide you with a brief overview of some key developments during that time, as well as some insight on what can be expected as we head into the next three months of the year.
While the first three months of 2020 was dominated by anxiety surrounding the initial outbreak of COVID-19 and the ensuing lockdowns and capital market declines, the second quarter of 2020 demonstrated a remarkable bounce back in those markets – even with a resurgence of the virus in countries such as the U.S. and Brazil and renewed lockdown measures taking place.
The S&P 500 Index, a broad measure of U.S. equities, had its best quarter in over 20 years, gaining 19.95% (in U.S. dollars), while the Canadian S&P/TSX Composite Index gained almost 16% (in Canadian dollars) in the three months ending June 30th. This was quite a recovery from the sharp declines by the end of Q1 on March 31st, but unfortunately these 2 indexes were still in negative territory for the year so far. The year-to-date returns are -4.04% for the S&P 500 and -9.07% for the S&P/TSX. This pattern is similar to most of the other indexes. For instance the MCSI All World Index is down 7.14%; the Euro Stoxx 50 Index is down 13.5%; the MSCI Emerging Markets Index is down 10.73%. In fact, the only major world equity index that is in positive territory is the NASDAQ index, which is up 12.11% year-to-date. This index is heavily weighted in technology and healthcare companies, some of which stand to benefit from this healthcare crisis.
Energy prices rose as the economy began slowly re-opening and production cuts trimmed inventory, but not before prices fell below zero for the first time in history on April 20, ending the day at -US$37.63 per barrel. Just so you know that is not a typo, you would have to pay someone $37 to take your oil (storage was at full capacity). And while virus data, economic numbers and other headlines seemed bearish, markets remained optimistic and continued to climb on most days in April, May and June. Oil prices rose in May and June as rising economic activities resulted in rising demand. Oil prices finished the 2nd quarter at $39.27 US$ per barrel. With people nervous the price of gold rose to $1780.96 US$ per oz.
Much of the capital market’s enthusiasm has been attributed to government and central bank intervention designed to support global economies. In particular, the U.S. Federal Reserve’s introduction of quantitative easing measures, emergency lending and purchases of corporate bonds and exchange-traded funds are believed to have played a vital part in this rise. The Bank of Canada matched the Fed’s willingness to purchase corporate bonds to assist credit markets, while indicating it believes the economy will return to growth in the third quarter. The Fed said it expects 5% GDP growth in 2021, and as for the support it has been providing to the system, Fed Chairman Jay Powell said the agency was, “not out of ammunition by a long shot.” Government bonds declined as both the Federal Reserve (the Fed) and Bank of Canada indicated rates would remain low for a lengthy period. The 10 year Canada Govt. bond yield was 0.53% and the US Govt. 10 year yield was 0.66% at the end of June.
Headlines concerning vaccine progress and phased economic re-openings also seemed to support market moves to the upside. Over 100 teams of scientists from around the world are working to develop and test a vaccine for COVID-19. Promising vaccine data from various companies continued to be announced, while in early May the U.S. Food and Drug Administration granted emergency use authorization for Gilead Sciences’ antiviral drug Remdesivir as a treatment for COVID-19 patients.
Investors also reviewed more negative developments as the quarter came to a close, but these had little impact on the markets’ recovery. These included escalating tensions between China and both the U.S. and India, rising infections in 37 U.S. states (with 50 per cent of states halting or rolling back their reopening plans), and data showing 31.5 million Americans collecting unemployment cheques as of mid-June. The Fed said it expects U.S. gross domestic product (GDP) to shrink by 6.5% in 2020, and the International Monetary Fund (IMF) expects global economic output to contract 4.9%. Ratings agency Fitch Ratings, meanwhile, downgraded Canada's credit rating to AA+ from AAA to reflect the deterioration of public finances due to COVID-19.
If anything, the last two quarters have proven just how important it is to stick with a long-term, diversified plan to withstand market shocks. It would have been almost impossible to predict that shortly following the close of the first quarter, the S&P 500 would have the best 50-day period in its history and the NASDAQ would reach new all-time highs. Had we chosen to change course and attempt to time the market, we may have missed out on this rapid recovery. I continue to believe that at times of great uncertainty, discipline and the ability to remove emotion from one’s financial decisions become an investor’s most valuable assets. These characteristics, combined with your trust in me to manage your portfolio objectively, have allowed us to navigate that uncertainty in an effective manner.
Going Forward
As we begin the third quarter, there is no way of predicting how the markets will react, and whether monetary and fiscal support will outweigh future outbreaks of COVID-19 and any subsequent economic disruptions. What we do know is that volatility remains a distinct possibility, and that history shows continuing to stick to a well-constructed, long-term plan has been the right move. The chart below titled "Market volatility - It's normal" illustrates this point nicely.
There are 3 lines to review below. The light blue line is the VIX (a volatility index that shows how volatile the market is on a daily basis). The dashed orange line is also the VIX but the 1 year moving average, not the daily ups and downs. And then there is the dark blue line, the total return of the S&P500 Index. Notice how the volatility spiking at the various dates below pushed many people to sell and leave the market, only to see the S&P500 recover and eventually go higher. Notice how the daily VIX spikes eventually diminish and that since 2013 the one year average VIX is around 14 to 16. The daily VIX spiked at 82.7 on March 16, 2020 and closed this quarter at 30.4 on June 30th.
Volatility will always be present in public stock markets. If the week doesn’t have a holiday, then Monday to Friday, 9:30am to 4pm Eastern Standard Time, there is a seller and a buyer of those company shares. That is the trade-off for the higher rates of return in stocks; you have to put up with the ups and downs on a daily, hourly or even minute by minute basis.
Going forward I think companies that will do well over time will have: clear business strategies, economic moats, workforce diversity, attention to Environmental, Social and Governance (ESG) factors, returns above the cost of capital, strong balance sheets, positive cash flow, and skills leveraging technology.
In closing, I wish you and your family well and remind you that I am always happy to discuss your investment plans. If you have any questions, please send me an email or call me at (519) 432-6744. I am at extension 238 and my assistant Susan is at extension 239.
All the best,
Mark McConnell, BA (Economics), DipBIS
Senior Investment Advisor, Branch Manager
Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.
This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. The information in this letter is derived from various sources, including CI Investments, Fidelity Investments, cnbc.com, Bloomberg Finance L.P, oilprice.com, marketwatch.com, The Globe and Mail, reuters.com, the U.S. Food and Drug Administration, Yahoo! Canada Finance, Trading Economics, TD Newcrest and PC Bond. This material is provided for general information and is subject to change without notice. Although every effort has been made to compile this material from reliable sources; no warranty can be made as to its accuracy or completeness, and we assume no responsibility for any reliance upon it. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.