May 22, 2020
Making Cents of the Markets
Be in the Know
After pulling back last week, US markets jumped up 3% on Monday on news that the pharmaceutical company, Moderna Inc, was seeing positive initial results from a potential vaccine. This study showed that their vaccine was safe and created more antibodies to protect against coronavirus. It is still early in the testing process as there are still two phases of testing left but this initial indication is positive that we are on the right track. Regardless if Moderna is successful, investors are hopeful as over 100 companies are currently working on a vaccine. Investor sentiment remains positive and continue to stay focused on the future of the economy and how it looks to improve in the near-term.
Markets were able to hold onto their gains from Monday but were flat for the remainder of the week as the Canadian market finished up 2% as well. On Monday, we saw a broad based rally led by cyclicals like industrials, travel, and leisure stocks as these would benefit most from the economy returning to normality faster. At best, it will still take a few months for a vaccine to pass through all the tests before being approved for distribution. President Trump and his administration claimed that a vaccine could arrive in 1 to 1.5 years which is possible if testing, manufacturing, and distribution are fast-tracked.
We had a relatively light week of economic data with notable points on Canadian inflation and retail sales. The annual inflation rate as of April came in at -0.2% which is the first negative reading since 2009. The main culprit behind the decline was lower gasoline prices as we want to point out that food prices increased 3.4% from last year given potential supply disruptions that occurred in the past few months. Retail sales in Canada fell 10% in March which was in line with expectations as investors look forward to improving conditions in May and beyond as provinces continue to re-open various businesses.
After adding equity and fixed income exposures over the last number of weeks, we remained disciplined on the sidelines as markets opened the week strong and did not weaken materially afterwards. Our main concern today is that technology continues in a “V-shaped” manner while economically sensitive sectors like industrials and financials remain depressed and are unable to head higher with the overall market over the past 2 months. This diversion makes sense in today’s context as technology firms are able to weather the effects from the economic shutdown better but it appears as technology is starting to look like a near-term bubble as it cannot continue to go straight up forever.
Eventually, these leaders will pull back and the market will likely follow as technology makes up a greater weighting of the overall market today than at the start of the year, which is why it has generally led markets either higher or lower. Positive sentiment on the improving future of the economy has driven markets higher, despite numerous challenges that businesses and individuals continue to face. We are content with our diversified and defensive positioning today as we participate in the recovery and remain focused on quality companies long term at attractive valuations. With this focus in mind, we look forward to navigating this market environment and moving closer to our target allocations as discipline is essential to protect and grow capital over the long-term.
Chart of the Week
With the extended lockdown period that most have faced globally, we have seen personal saving as a percentage of disposable income increase to levels not seen since the post-financial crisis peak in 2012. This can be seen below in the chart that shows the percentage of personal saving in the US since 1990:
In March we saw the personal saving rate soar to 13.1% which is a new high over this time period. There is definitely some pent-up demand ready to be released, though not everyone will have the ability to spend given the rapid pace of layoffs, furloughs, and salary cuts. The implication is that the increased propensity to save is likely a ticket to slower growth as consumer spending drives most of the economic growth in North America. Government stimulus will lessen this blow though there are more reasons to remain conservative than to take too much risk at this juncture in markets & the economy.
Beyond the Markets
June 2020 is ALS Awareness Month in BC and the province is showing its support by lighting some of its most prominent landmarks in the ALS colour purple! It is a vibrant dedication to all those suffering from the disease and a way to bring awareness to our community. Other events taking place in support of ALS research and awareness include the Virtual Walk to End ALS taking place on June 20th as well as the PGA of BC Golfathon for ALS where BC golf professionals will play from sunrise to sunset, raising funds for the cause. You can also click here to make a donation to the ALS Society of British Columbia.
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners an update on the markets, business closures and layoffs, as well as the importance of understanding what you are invested in. 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.