April 17, 2020
Making Cents of the Markets
Be in the Know
Markets were relatively flat this week before rallying 3% on Friday as the TSX and S&P 500 closed the week up 1.4% and 3% respectively. The surge in buying on Friday was mainly due to news that a large pharmaceutical company, Gilead Sciences, reported that they have seen positive initial results from their treatment for COVID-19. The company said that official results on the drug should be out before month-end as this could potentially reduce the need for the extreme measures shutting down the US economy. It is clear that the market is looking for any positive news these days as we continue to obtain negative economic data that has largely been priced in already.
One surprise this week is that Stats Canada pre-released the GDP report for March of this year as the economy showed a decline of 9% for the month and is forecasted to drop 2.6% for the 1st quarter. The International Monetary Fund expects that the economy will shrink by 6% this year before rebounding next year by 4%. This is a bit more of a decline than other developed nations as we have been more negatively impacted by falling commodity prices such as oil and lumber which are major exports for our country. We are hopeful that these commodities will bounce back once economies are reopened as demand increases.
Economies have continued to reopen globally as Germany announced that they will begin to gradually allow certain small businesses to resume operations on April 20th, while schools will start to reopen on May 4th. What we have learned from Asian countries is that the recovery is easier and quicker in manufacturing and construction than consumer services as behaviors will likely be different until there is a vaccine. While governors within the US are coordinating to release state-specific plans, Trudeau has remained firm that it will be at least a few weeks before the stay-at-home guidance is relaxed. It will likely be on a province-by-province basis when our economy can start to return to normal, but we are optimistic that BC will be able to open sooner due to the lower count of COVID cases relative to other provinces.
Our portfolios, while positioned defensively for this uncertain environment, have participated well in the current rally. We seem to be in the right sectors that have benefited greatly even though we are taking less risk overall than markets by choosing to not be fully invested at this time – we aren’t out of the woods yet! We continued to dip our toes in the water, adding specific companies that we believe will be able to offer strong growth or income for you moving forward. These included AT&T which has a strong dividend yield close to 7% and Alibaba which is basically the Amazon of China. Amazon has clearly demonstrated to be a market leader in North America thus we are confident that Alibaba will do the same in China given that consumer behavior has changed even though the economy has reopened. There has been a change amongst consumers and enterprises that have brought ensuing opportunities that we believe that Alibaba will be able to take advantage of.
We believe that we have seen the initial V of this recovery and still expect volatility to continue as the economic shock will ripple through various areas of the global economy. Industries such as energy, airlines, hospitality, and retail will continue to be challenged even after global economies reopen and there will likely be a decrease in spending for some time until behaviors return to normal. We continue to monitor conditions closely and look to invest in those opportunities that will weather the storm better than most, therefore we have limited or no exposures to any of these areas.
Chart of the Week
One of the major shifts that we saw this week was that Microsoft, Apple, Amazon, Google, and Facebook now represent over 20% of the entire S&P 500. Microsoft and Amazon have led the surge higher (we hold both) as they continue to take advantage of the opportunities that are coming out of these challenging conditions. The charts below highlight how their percentage has grown over the last week and how their valuations have also increased as a result but remain justified given their high margins and growth over the number of years:
Source – Bespoke Investment Group
Beyond the Markets
We hope that everyone is well during this time of self-isolation! While this period in our lives is very different, it is important to remember the sacrifices our essential workers are making to keep us all safe. This includes those in healthcare, food service, transportation and other vital service industries. For the ones putting their lives at risk to help others, we encourage everyone to make noise at 7:00pm each and every day. So grab a pot, or clap and cheer to remind them that their hard work and dedication is cherished!
Source – The Sociable
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners an update on the markets, the economy in BC, and investment return expectations. Listen here.