May 1, 2020
Making Cents of the Markets
Be in the Know
Markets rallied early in the week but sold off most of their gains on Friday, finishing slightly red in the US and up 1.4% in Canada. Canada outperformed this week due to a bounce in energy and financials which are still lagging the overall index by large margins this year. There were a number of important news items that moved the market this week that included earnings reports from many of the largest companies in the index and economic data also covering the impacts from the first quarter. After a strong bounce off the lows, markets have now moved sideways over the last 2 weeks as investors digest new information and continue to make new estimates of the new normal moving forward.
Many of the largest companies in the US released their 1st quarter results which continue to come in above analyst expectations. Google, Microsoft, Facebook, and Apple all beat expectations and recorded strong growth numbers as their businesses were far less affected by the pandemic due to our reliance on technology and services. Amazon was the surprising miss and brought the market down at the end of the week. While revenues were strong, profits declined from last year due to the fact that the company reinvested a fair amount of their earnings into infrastructure for the increased growth in demand – a positive move by management in our opinion. These are the clear winners throughout this environment as many of their businesses have continued to thrive. On the opposite side, there are many companies that are struggling including energy, financials, airlines, entertainment, and retail. Out of the 500 companies that make up the S&P500, over 1/3rd have reported thus far and we have seen overall earnings decline approximately 15% for the 1st quarter which reflects the temporary weakness from these businesses. As stated previously, we will have a much clearer picture of the recovery after the second quarter that will include a larger impact of the shutdown but may also incorporate economies and businesses re-opening again.
Economically speaking, we saw US and European GDP decline 4.8% and 3.8% in the first quarter of the year which were the largest declines since 2008. Most of this drop took place in March as incomes and spending declined 2% and 7.5% respectively. Over 60% of US GDP comes from consumer spending thus it makes sense that we saw such a sharp decline as consumers have been stuck indoors. We expect that economic data will be worse in April but could start to improve in May as many countries have announced plans to re-open their economies in the coming weeks. Markets remain optimistic that this recovery will be strong once doors open again but we remain conservatively positioned as we plan to take advantage of any near-term weakness that occurs.
Over the past few weeks we continued to add small amounts of equity and fixed income to our portfolios but have done so in a disciplined manner as we focus on quality businesses that we believe will not only survive this weakness, but thrive once a recovery is underway. These include new portfolio additions such as Alibaba (China’s Amazon), Diageo (global spirits/alcohol producer), and Walmart (leading grocer). We have added small positions and remain well below our target equity weight (holding extra cash) as it is likely to see some sort of pullback after such a strong move off of the lows.
We believe that markets have seen such sharp volatility because sentiment has driven the market in both directions. On the downside, we saw panic selling and continued fear around all of the uncertainties around COVID until cases started to peak globally. Then on the upside, we saw markets increase sharply due to the 3 R’s – Re-opening, Recoveries (economic), and Remdesivir. The last one is a treatment for COVID that was approved by the FDA this week for emergency use as official results showed improvements in patients who took the 5-day treatment. The main reason though is the significant financial stimulus from global central banks to ensure that the economy recovers quicker than originally expected. This backstop from the government gives us the confidence to be bullish going forward as we plan to continuously shift the portfolio to take advantage of opportunities that present themselves.
Chart of the Week
YTD 2020, global central banks have dedicated more than $8 trillion to fight the negative effects created by the pandemic. Most of this support has been generated by the US Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China which are highlighted in the chart below:
Source – Haver Analytics (Yardeni Research)
On an annual basis, this represents an increase of approximately 15% of the total assets of these central banks which is a significant pro-active measure put in place. Many question the consequences of these moves as they are largely unknown however we do know that the damage would be worse if global governments did not step in or supported the economy slower like in 2008, thus believe that the moves are quite positive when you take this perspective.
Beyond the Markets
While we still find ourselves unable to do most of the activities we enjoyed pre-outbreak, many organizations are providing people with alternative entertainment. Such organizations include The Globe and The National Theatre which are now showcasing performances on their YouTube channels for free! Currently, you can watch Romeo and Juliet featuring Ellie Kendrick and Adetomiwa Edun as well as Frankenstein with Benedict Cumberbatch. The performances are only available for a limited time, so take advantage of this opportunity to experience the theatre!
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners a market update and discussed the importance of estate planning. Listen here.
Take a look here at our most recent North Shore News article where we discuss the importance of active investing and how it compares to passive investing.