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Another COVID variant has been uncovered in South Africa. The market’s swift downward reaction was not unexpected, especially given the strength we saw in equities in the beginning of November and even year-to-date. Before panicking though we recognize that society is much better equipped to deal with this development than it was just a year ago.
Throughout the challenging environment of the pandemic, many companies – across multiple sectors – have been able adapt well and continue reporting record levels of profitability. How long this can last is a key question as it will have a significant impact on the value of stock markets. Encouraging is that there remains considerable pent up demand for many products, including cars, electronics and technology solutions, which should extend through 2022 and into 2023. Longer term, productivity gains (from technology investments) should help counteract negative impacts of inflation.
Inflation remains a key part of the investment narrative and this will likely continue for the short term. The recent impact has been felt by consumers through prices at the pump, grocery store and car dealerships to name just a few examples. For manufacturers, retailers and transportation companies, critical supply chain issues continue to hurt production and increase total production costs.However, the extent of inflation on markets is more complicated since mild inflation can actually be a positive as it provides additional pricing power to well-positioned companies and confirms that the risk of a deflationary trap is behind us.
Typically August kicks off a weaker 3-month period for markets as the August to October window is the weakest consecutive three-month period of the calendar. However, this month the S&P 500 saw the strongest August performance in the past 20 years, bucking this trend.Fed Chairman Jerome Powell made comments mid-month at the Jackson Hole Symposium, highlighting that although the economic recovery is making progress, there remains slack in the labour market leaving optimism that the central bank won’t be increasing rates any time soon.
July saw markets add to gains made earlier this year as both Canadian and US equities ended inpositive territory. Helping drive this performance has been corporate earnings, which have been very strong for companies this quarter. In fact, this earnings season is one of the best on record, with (as of writing) more than 85% of the stocks in the S&P 500 reporting having surprised to the upside, a record over the last 30 years.
Markets finished off the first half of the year on a strong note with equities in Canada and the US gaining over 2% in each local market. Bonds even joined in the fun as the Canadian bond universe was up almost 1% during the month. Elsewhere, after gaining close to 6% through May, the Canadian dollar gave back over 2.5% to its US counterpart during June.
It was Canadian equities outperforming their counterparts south of the border for a change, driving equity performance for the month of May. During the month rising oil prices and strong numbers from the big banks led the S&P/TSX more than 3% higher. Meanwhile, in the US the S&P 500 was only marginally positive, but dipped into negative territory after accounting for a stronger Canadian dollar.
North American equity markets in April posted strong performance on the back of increasing optimism about vaccine rollouts and the economic recovery. After a slow initial roll out, Canada’s vaccine distribution has picked up steam, while in the US many regions have opened up fully allowing larger gatherings and removing mask requirements.
Steep and getting steeper. This is the best way to describe the shape of the yield curve right now. What does that mean for markets and why does it matter for investors? In a nutshell, the yield curve measures the difference between long term rates (e.g. 10 year+ interest rates) and short-term rates (3 months to 2 year interest rates). When long rates rise faster than short term rates – as they are currently doing – this has historically been a bullish sign for stocks, and particularly sectors such as financials and other cyclical stocks.
The market narrative has shifted of late to the risk of higher inflation with an associated sharp rise in interest rates (although they remain very low by historical standards). This makes intuitive sense since vaccination is accelerating - more so in the U.S. where almost 20% of the population has received at least one shot - which should help unleash pent-up consumer demand in the second half of 2021.
In recent weeks we have been receiving questions from clients inquiring about current market conditions. Markets have continued to rally this year, while COVID news continues to show challenges. January also saw retail investors take aim at hedge funds which have shorted names that were potentially headed toward bankruptcy.
Happy New Year to all. This month’s update starts with a market review of 2020. Last March, stock markets experienced one of their most dramatic downturns in history when COVID-19 forced economies to shut down. What followed was one of the fastest and steepest global recessions in decades. Then came a rapid recovery for both stocks and the global economy.