360 Private Wealth Management: 2020 Q2 Market Update
360 Private Wealth Management: 2020 Q2 Market Update
Stock markets so far in 2020 have resembled riding a wild roller coaster for investors. Despite a very weak economic outlook earlier in the year due to uncertainty surrounding the coronavirus, major global stock market indexes have recovered most of their losses for the year. Investor sentiment seems to have improved due to several reasons:
- Government support: Interest rates have been cut to nearly zero in many developed economies. As well, governments have created many programs that have deployed billions of dollars of support for individuals, corporations and municipalities.
- End of lockdown: Many countries, initially led by China and Germany and later joined by the United States, have begun to slowly reopen their economies.
- Health care: There have been positive developments on the health care front. Reports indicate there’s a possibility the average length of time to develop a vaccine has been shortened along with encouraging news surrounding drug therapies.
In March, the Canadian investment fund industry had its worst month ever, in dollar terms, as it saw more than $14.1 billion in net selling. Investors who followed a disciplined approach and stuck with their investment plan have seen their portfolios regain most of the losses. In times of uncertainty, it’s crucial to remain focused on your long-term goals and avoid costly mistakes that are often dictated by emotion.
So, how far have we come from the market lows experienced in March? In Canada, the S&P/TSX Composite Price Index rallied 16.0% in the 3 months ended June 30th for a year-to-date return of -9.1%. In the United States, the S&P 500, Dow Jones, and Nasdaq Price Indices rallied 20.0%, 17.8% and 30.6% from the end of March through June 30th for a year-to-date return of -4.0%, -9.6%, and 12.1% in U.S. dollar terms. In overseas markets, international equities were up 14.2% in the 3 months ended June 30th, in U.S. dollars as measured by the MSCI EAFE Price Index, for a year-to-date return of -12.6%. These numbers are significantly higher than where they stood the last week of March. While indexes have recovered nicely, they do not necessarily tell the whole story. Markets, particularly in North America, have effectively “bifurcated” (split) into two “camps”, with many tech and bio-tech stocks (along with many popular consumer staple stocks) bouncing out of the depths of the market correction to actually see new highs here on the year. Note the fact that the Nasdaq index is now actually in positive territory for the year, largely on the back of its largest constituents (Apple, Microsoft, Amazon, Alphabet, Netflix and Facebook). The more traditional “core” economic stocks like banks, transportation companies (particularly airlines), industrials, energy and many consumer-related companies are still stuck at levels below (in some cases well below) the highs seen in the first couple months of the year. The fact that the popular S&P 500 broad market index actually contains a number of tech and bio-tech stocks has skewed the actual index results over the last few years and most notably this year to date. At last check upwards of 20% of the total valuation of the S&P 500 index was concentrated in just 5 mega-tech stocks: Facebook, Apple, Amazon, Microsoft and Google. The S&P 500 is no longer the broadly diversified, even somewhat defensive stock index your parents might have invested in…
The recovery in the various market indexes and the bifurcation that has occurred seems to indicate that investors have been tilting their investment bets in the direction of perceived winners in the COVID-19 economy; companies like consumer staples, tech companies benefitting from the remote work and the emphasis on stay-at-home entertainment, and on companies focused on treatments and vaccines to treat and prevent future COVID-19 infections. The concern is that some of these companies now carry very high valuation metrics which they may not be able to deliver on, setting the stage for another market index pullback if the best-case scenario for these companies does not play out.
One more thing worth noting, much of the trading activity in markets around the world is now done by computers using very sophisticated algorithms. These algorithms can increase volatility both to the downside and to the upside in extreme conditions. A case could be made that the February-March decline and the subsequent surge here in tech and bio-tech stocks here may have been made more extreme by trading algorithms focused on momentum. Computers are not emotional animals. They simply trade securities based on a pre-programmed systematic approach. Most individuals (and even professional investors) are not as purely rational.
Many economists and investment market watchers suggest that markets are not reflecting the serious hit the underlying economies have taken and continue to experience, creating a disconnect between markets and the economy. Economic activity has fallen sharply around the world, driving global economies into recession. That said, markets tend to be forward looking; they tend to rise before economic indicators point to improved economic conditions and an eventual recovery. Historically, the bottoming period during a recession lasts for several quarters, rather than several months, and we believe this time is no different. Recovery may look like a two step forward, one step back process as economies slowly reopen, which will likely lead to market ups and downs over the coming months.
The recent surge in COVID-19 positive tests in the southern and western United States indicates that reopening economies is fraught with risk. Some areas of the US have put a hold on additional reopening efforts and, in some cases, even rolled back some reopening initiatives. The halts and rollbacks could have a significant negative effect on economic indicators in the affected states and even the country as a whole. Some of the states experiencing surges have large populations (Florida, Texas, California to name a few). In Canada, social distancing measures, travel restrictions and a seemingly better resourced health care network mean we may be better prepared for potential future outbreaks of COVID-19. But even here, the economic recovery will be gradual as we reemerge slowly and adapt to the new normal. In the rest of the world many countries, especially in equatorial region and the Southern Hemisphere are experiencing surges in COVID-19 cases and the accompanying economic fallout. In many countries where social safety nets are less developed or non-existent, people need to continue to work, exposing themselves and their families to the virus. Many of these same countries also lack the healthcare resources to deal with the surge in cases. On the other hand, countries that were once the epicenters of the disease (notably in Europe) are now gradually reopening their economies with some measure of success.
Clearly, we will have to wait and see how this all plays out. The health and economic situations created by COVID-19 are unique, to be sure. What will this new normal look like? Until we get an effective treatment or vaccine, or COVID-19 miraculously mutates away from having the potential for severe symptoms and outcomes (the latter not being a likely outcome!), it is with us and will impact our lives and finances. On the business and economic front, will sectors and companies that are still struggling in the face of the COVID-19 pandemic see business prospects improve sooner rather than later? Will pent up demand from the time out created by COVID-19 lockdowns in economies create a surge in economic activity and corporate business fortunes? Will the high-flying tech and bio-tech be able to hold onto their valuation surges? Will we see a resurgence in COVID-19 cases in the fall, here in the more northern countries? If so, how will governments deal with the case increases?
When it comes to investing in this extraordinary time, the message remains the same as any other time: Understand how investment markets work. Know your investment objectives. Focus on your long-term goals. Remove emotion from decision making. Diversify, diversify, diversify. If you need cash for income or other short-term needs, invest it into more stable guaranteed investments in line with the timing of the need.
If you did not fare well emotionally through February and March, take the opportunity now presented by the market recovery here to review and, if appropriate, consider rebalancing your portfolio. If your objectives are longer-term in nature, avoid market-timing. Contrary to what all the ads tell you, it is not a sensible long-term approach to investing. Instead, get your asset allocation right. This will help you manage your household’s portfolio volatility experience. When investing new money, consider investing smaller amounts on a regular basis over time, to take advantage of continuing market volatility. As stated earlier here, if you are drawing income from your portfolio, invest a portion of the portfolio into guaranteed liquid investments so you can quell the emotional need to sell investments at the worst possible time.
As always, if you have questions about the markets or your investments, I’m here to talk.
David J. Luke, CFP, RFP, CLU, CH.F.C., CIM | Financial Advisor
360 Private Wealth Management | Manulife Securities Incorporated
Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4
Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656
This publication is solely the work of David Luke for the private information of his clients. Although the author is a Manulife Securities Advisor, he is not a financial analyst at Manulife Securities Incorporated (“Manulife Securities”). This is not an official publication of Manulife Securities. The views, opinions and recommendations are those of the author alone and they may not necessarily be those of Manulife Securities. This publication is not an offer to sell or a solicitation of an offer to buy any securities. This publication is not meant to provide legal, accounting or account advice. As each situation is different, you should seek advice based on your specific circumstances. Please call to arrange for an appointment. The information contained herein was obtained from sources believed to be reliable; however, no representation or warranty, express or implied, is made by the writer, Manulife Securities or any other person as to its accuracy, completeness or correctness.