May 15, 2020
Making Cents of the Markets
Be in the Know
North American markets continue to trade within a range as they pulled back 2-3% this week on concerns about market valuations, comments from the US Fed president on the economy, and continued weak economic data. The pullback began on Tuesday when two well-known institutional investors voiced their concerns about where valuations are today after the strong rebound. The selling continued Wednesday when Jerome Powell, the US Fed president, warned that the US economy was experiencing an unprecedented hit that could permanently damage the economy if the government does not continue to provide financial stimulus to struggling businesses. All of this information was well-known yet the market used it as an excuse to sell off before rebounding at the end of the week.
The past week was relatively quiet in terms of economic or earnings updates though we did see US jobless claims come in higher than expected as the total number of unemployment benefit applications has risen to 36.6 million since the pandemic began. US retail sales figures from April were released on Friday and showed a 16.2% decline from the same month last year which was the sharpest drop ever, due to the shock that COVID has had on the US and other global economies. What is interesting is that markets rose at the end of the week after this data was released indicating that investors understand and expect this weakness and are focused on the recovery that is underway.
We are well aware of extended market valuations but also understand that valuations can remain elevated during times when the Fed provides significant stimulus measures and keeps interest rates low to stimulate the economy. Despite this, we still remain cautious in the near-term as markets have taken a breather from its advance off the lows and runs out of potential positive catalysts. Momentum has slowed and sentiment is relatively neutral as we expect markets to remain range-bound for now until some catalyst leads it higher or lower. We are positioned and ready for any scenario as we remain conservatively positioned in higher quality exposures and cash allocations.
We were quite active this week as we made a number of moves within portfolios but kept our total equity allocations at the same levels they were at a week ago. We took advantage of the recent strength in leading technology names and trimmed some of our holdings as most have staged “V-shaped” recoveries and are trading above or near previous highs. The market can continue to head higher but if it does pullback, then we will have the opportunity to add back to these names that will likely continue to lead the market higher or lower.
We also increased our holdings in strong dividend paying companies at what we believe are attractive prices and valuations. These companies include Proctor & Gamble, Manulife Financial, and TC Energy Corp which add more of a defensive tilt to our portfolios and strengthen our dividend yields while also offering opportunities to make good capital gains. We remain open-minded about the potential of a near-term pullback thus are confident and comfortable with our cash weightings so that we have the ability to buy additional market leaders if and when they pull back to our target prices.
Chart of the Week
Retail sales are a very important indicator for the US economy as personal consumption accounts for more than 60% of US GDP. We just witnessed the largest decline in history as retail sales declined over 16% in April from the previous year which makes sense when you take into account that most Americans were forced to stay at home and many businesses to close. Please see the chart below which highlights the changes over the last 25 years:
US Retail Sales – April 2020
Source – TradingEconomics.com / U.S Census Bureau
The biggest declines were seen in sales of clothing (-78%), electronics and appliances (-60%), and furniture (58%) as consumers mostly buy these items in stores vs. buying them online. The good news is that we should see some pent up demand for these items, though consumer preferences may change depending on their personal situations. We look forward to economic data in the coming months which should highlight improvements as the economic recovery picks up steam.
Beyond the Markets
As Vancouver and much of the world slowly begins to reopen we are seeing some things returning to a new version of normal. While some business will be opening in the coming days and weeks, we would like to remind everyone to be cautious. Remember to practice safe social distancing when you leave your home but do not forget to have fun! Click here to see a list of available activities to do in Vancouver and click here for a list of stores that will be open this weekend.
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners a market update and discussed employment reports and planning for retirement after the outbreak. 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.