May 8, 2020
Making Cents of the Markets
Be in the Know
After moving sideways in the last 2 weeks, markets rallied this week largely due to positive earnings updates from technology companies and sentiment around various plans to re-open as many believe that the worst is now behind us. US markets led this week as the S&P closed up 3.4% while the TSX finished 2.4% higher. Growth-related sectors like semi-conductors and technology continue to lead the market as investors focus on companies with strong profit margins that are less impacted by the economic weakness we are facing. The sectors that are lagging the market are financials and industrials as they are very sensitive to weakness in the economy and have near-term challenges to face. This divergence isn’t necessarily a sign of a healthy market though we understand that the market can continue to head higher purely on sentiment despite negative economic or news headlines.
If one looked at the move in the markets this week, they wouldn’t have guessed that US and Canadian unemployment rates rose to historic levels never seen before as reports were released on Friday morning. US unemployment increased to 14.7% in April as the number of jobless rose to 23 million. Canadian figures came in at 13% as our economy shed 2 million jobs. The positive news is that these estimates came in below expectations and that most of these job losses are likely temporary in nature as most businesses re-open across North America in May. We don’t disagree with this notion but are cautious that the masses won’t be asked to come back as quickly as they were told they were being laid off. This should be particularly true for the tourism, travel, and hospitality industries.
Locally in BC, we received a much anticipated four-phase plan to reopen the economy from Premier John Horgan this past Wednesday. As of mid-May, medical & healthcare services, retail shops, hair salons, restaurants, offices, beaches, and provincial parks will open again. This will be followed by hotels and resorts in June, certain theaters in July, and eventually schools in September though there may be a mix of online and in-class instruction for post-secondary institutions. There are still no plans to resume large gatherings as international travel and tourism will also remain restricted. We believe that this is a very positive step for our province as we look forward to a return to normality soon.
After adding positions over the last month, we trimmed our equity exposures marginally and added to our holdings in gold as the precious metal pulled back mid-week. Global central banks continue to add stimulus measures and debt which supports holding bullion as those measures typically devalue one’s currency which leads to gold becoming more attractive as a potential safe haven. India and Brazil were two of the latest countries to add more stimulus measures this week which continue to strengthen the argument to holding bullion in one’s portfolio.
The rally off of the lows has been very impressive and has puzzled many analysts as valuations for the market remain relatively high as sentiment drives the action higher. Volumes remain relatively low as institutions including Berkshire Hathaway remain patient with larger than normal cash holdings. For these reasons, we are content with our equity exposures and only look to buy companies that we believe are attractively priced. As markets head higher, we continue to participate as we are exposed to the leading sectors that are partaking in the rally, yet we still have some cash on the sidelines.
Chart of the Week
A common question we receive from clients is on interest rates and our expectations of them moving forward as many look to re-finance their mortgages in today’s low interest rate environment. One tool that we use is the government yield curve which shows the current “risk-free” rate that investors can receive when investing in government bonds. These rates directly affect prime rates and thus mortgage rates, making it very important to follow. To better illustrate this, we have provided the US yield curve below that shows these interest rates over the next 30 years:
Source – CME Group
As one can see, interest rates are expected to remain near zero in the US for the next 2 to 3 years which is consistent with what the Federal Reserve has stated on keeping rates low until the economy comes back to full employment. The curve is very similar in Canada as we could potentially see rates stay lower for longer as Canadians have higher household debt levels and could potentially need additional support for our economy to reach full employment. Regardless of various views on the economy, we believe low rates are here to stay for years to come.
Beyond the Markets
While this Mother’s Day will be vastly different to the ones experienced in the past, it seems more vital than ever to remind all moms just how important they are! If safe, we recommend delivering flowers or baking and dropping off a sweet treat. You can also set up a zoom call or send a heartfelt letter detailing your appreciation. Whatever you decide, make sure to remind your mom just how much you value you her.
From the Pinkowski Wealth Management Team, we wish all those a Happy Mother’s Day!
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners an update on the markets and the economy as well as real estate in Vancouver. 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.