April 24, 2020
Making Cents of the Markets
Be in the Know
Markets took a breather this week as US markets pulled back 1-2% while the Canadian market closed relatively flat. News events were relatively mixed and accurately reflected the sideways movement in the markets. On the positive side, the US government passed a $484 billion interim stimulus package to allocate more capital towards the small-business loan program, healthcare providers, and virus testing. This adds to the $2 trillion package and highlights the government’s commitment to supporting the economy no matter what as the total stimulus is over 10% of last year’s total US GDP.
It has been positive to see markets digest the recent gains and trade in a less volatile fashion than before. They have been resilient in the face of negative economic data as they shrugged off reports this week that showed large declines in global manufacturing and service activity. We believe that this weakness is largely priced in by markets as they are forward-looking in nature and have shifted the focus to companies reporting their 1st quarter’s financial results for a clearer picture moving forward.
Earnings season is well underway with over 20% of companies having reported thus far. Most companies continue to beat analyst estimates to the upside but are withdrawing guidance for the upcoming quarters given the uncertainty around how the economic rebound will look like. We saw a number of companies including major telecoms, railroads, and technology companies report this week and were generally pleased with their results. We remain cautious as the 2nd quarter will be much more telling of the full impact from the economic shutdown and will likely include data on the initial recovery, allowing analysts to better extrapolate the recovery moving forward.
As markets moved sideways, we continue to slowly put more capital back to work in specific areas of the market but remain patient as we are generally content with our equity exposures at this juncture. A fair amount of uncertainty still remains thus we value our remaining cash positions as they will allow us to buy our favorite companies at lower prices if we see some weakness in the coming months. Otherwise, we have added more fixed income to portfolios as cash flows and opportunities have increased as a result of the volatility in March.
We had about a quarter of our Legacy portfolio companies report earnings this week that included names like Coca-Cola, Intel Corp, and Verizon. Most of our companies have beat estimates on earnings but have seen mixed results in revenues as COVID has temporarily slowed activity which has been combatted with various measures to cut costs and drive efficiency moving forward. It is clear that the latest period has been challenging for most but we are optimistic that many companies will learn from these, adapt, and come out of this year even stronger than before.
Chart of the Week
This week we’re not going to look at any specific chart but rather focus on an interesting piece that we read from Ned Davis Research this week – this is the four steps to a bottoming process as markets take time to establish a bottom in the market and eventually head higher.
The Four Steps to a Bottoming Process
1) Oversold – Markets sell off beyond what is considered “normal”
2) Rally– Markets bounce off of the first low and head higher
3) Retest– Markets then pullback again to some extent
4) Breadth Thrust – Participation and volumes increase
Source – Ned Davis Research
Currently we have seen steps 1 and 2 take place and now expect that there will be some sort of retest. Of course these steps aren’t guaranteed to happen but are based upon past selloffs in markets that have all been driven further than expected due to human emotions. While the reason behind the selloff always changes, human behavior does not thus we expect this general process to follow suit before we position back fully into our target equity allocations.
Beyond the Markets
While we all sit at home and patiently wait for news regarding when life will be returning to normal, the Museum of Vancouver wants to hear how you spending your time in self-isolation. They are asking Vancouverites to post videos, writings, and or performances showcasing how they are adapting to life in this new reality. Share your story on Instagram and Twitter using the hashtag #IsolatingTogetherMOV to take part. The posts will be showcased on the Museum’s website so you can check it out and get inspired with some cool, new ideas.
Source – Museum of Vancouver
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners an update on the markets and oil. Listen here.
Take a look here at our most recent North Shore News article where we discuss the importance of active investing how it compares to passive investing.