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David Bruce
Matt Smith
Chad Lucas
Hayleigh Blaikie

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Quarterly Commentary

Q news – third quarter 2020

The objective of Q news is to help you understand our services as well as clarify, educate and invite your questions.
I hope that you are all staying safe as the second wave of COVID-19 moves through Canada.  As a vaccine comes closer to fruition and treatment options have greatly improved, I hope that you share my sentiment in seeing light at the end of the tunnel.

"More is lost by indecision than wrong decision"
 -Carmela Soprano (originally Marcus Tullius Cicero, Roman statesman, lawyer and scholar)
 
The best outcome in the coming U.S. election will be a result that is certain.
The 3rd quarter of 2020 saw a continuing recovery in markets albeit more muted that the 2nd quarter.  Volatility also increased as uncertainty around U.S. stimulus plans, a beginning of a worldwide acceleration in COVID-19 infections (with a relatively lower mortality rate) and the pending U.S. election dominated headlines
 
 
U.S. administrations and stock performance
 
Of the past few months I have had a number of discussions around which administration would be best for the stock market.  Would a republican administration which is traditionally pro-business continue to thrive after COVID-19 and its affects have passed on?  Would a democratic administration drastically increase taxes and spending stall an already stalling recovery?   As the quote at the start of this letter describes the best result will be a clear result.
 
Historically there is little correlation between stock market performance and the administration in power.  An article in Forbes magazine this past July shows that in fact since Truman, democratic administrations have shown much better cumulative performance.  The S&P 500 being up a cumulative 569% under a blue mandate vs. an increase in 306% during a Republican Administration.  The following chart shows a breakdown of S&P returns by president (with the exception of Truman which shows the Dow Jones Industrial Average return).




Source: YCharts, Forbes

Forbes notes that these numbers must be taken with a grain of salt as the recoveries in some instances were already well under way such as at the start of Bill Clinton’s presidency and of Donald Trump’s.  Most importantly, the article points out that if you invested $1000 the day Truman was elected you would have $2 300 000 today.  The article goes into a little more depth on each administration since Truman and can be found by clicking here
 
 
Are we still in recovery?
 
The latest report from our Chief Economist Doug Porter and his team points to some positive results.  As China was the first to deal with this virus they are further along in the recovery.  They have seen a 10% gain in exports since this time last year (despite a pandemic and a trade war with the world’s largest economy).  The Chinese are spending more as well with a 7% growth year over year in auto sales.  U.S. numbers continue to improve with retail sales up 5% from a year ago with Q3 rising at an annualized pace of 66%!  Stock market performance depends a great deal on the perceived health of the largest economies and this is why we focus a great deal of our attention on the U.S. and China.  Four your interest, click here for an infographic from visualcapitalist.com showing world economies by size and also their respective contractions in Q2 of this year.
 
Bond markets are often a bellwether for poor stock market performance and a downturn in the economy.  One measure of this is the difference in the interest income a corporate bond pays and the interest a US treasury bill pays.  The larger the difference, the more trouble the stock market is in because higher interest rates for corporate debt the more trouble corporations will have servicing their debt.  Canso Investment Counsel provides the following chart that shows where this credit spread is today and where it has been over the last 24 years.  While the spread is currently above average it has halved from where it was just months ago and is nowhere near the peak in 2008.
 



Source: Canso Invstment Company

Bond fund managers can make money by buying investment grade bonds when this spread is higher in anticipation of the spread returning to the average in the future.  This can be risky of course but the uncertainty creates opportunities as always.  By taking on risk, Canso’s Lysander Corporate Value fund has grown by 10.8% this year to the end of September.
 
 
Jobless recovery
 
As in the 2008 recovery, this recovery has so far been marked by persistent unemployment.  Sal Guatieri senior economist from our BMO Economics team shows that while there has been a drastic improvement in unemployment from the shutdown phase of the pandemic, there is still a ways to go to reach the pre-pandemic levels.  Of course, the sectors that are suffering the most from the shutdowns and pandemic are showing the highest unemployment levels.

 



Source: BMO Economics, Haver Analytics

Many businesses will not reopen in the most affected sectors which makes the economy more vulnerable if the pandemic drags on longer than expected. More shutdowns are required which would certainly put a dent in consumer spending.  Given that some of these sectors will be permanently changed and further advances in automation this jobless recovery may go on for some time.
 
 
Real estate trends here to stay?
 
Real estate sectors have seen realignment in the U.S.  One of the defining features of the 2008 recession was the collapse in U.S. real estate (as in most recessions).  For single family units in the U.S., the opposite is true today as a 13 year high was reached of a 1.108 million units were starting to be built in September according to Jennifer Lee another senior BMO Economist.  Sales of single family detached homes have reached an all-time high as is evidenced by this chart.




Source: National Association of Home Buyers/Haver Analytics


A Very Different Recession  
 
History often repeats itself and in the world of investing and economics this is often the case.  This recession is truly unique in many ways.  At the risk of overloading this newsletter with information from our BMO Economics team the information is too interesting to ignore.  On top of the housing anomaly shown above Doug Porter points out that:
 

  • Personal incomes and savings rates are up not down.  Incomes have risen 5% in the U.S. and savings rates have risen 16% in both the U.S. and Canada.  Certainly we have all cut back on services that are simply not available to us as well as purchases such as clothing and other items.  This has contributed to this increased savings rate.
  • Bankruptcies have thus far dropped 40% in Canada from the same time last year.
  • This is the most likely the shortest recession on record.  Since World War II the average recession has lasted 12 months and if the recovery stays on track the COVID-19 recession will have clocked in at 2 months.  That being said the Q2 GDP drop was the largest since WW II.
  • In most recessions all sectors of the economy are affected negatively and in this one some sectors are thriving while others are devastated.
  • Stocks have recovered from massive losses in a matter of weeks.

Certainly, many of these outcomes are the result of worldwide coordinated stimulus that has been unprecedented in both size and speed of delivery.  The question will now be how long to provide the stimulus and at what level to promote some (but not too much!) inflation and how these worldwide government deficits will be managed going forward.
 
 
May you live in interesting times
 
 A pandemic, worldwide civil unrest, a U.S. election pitting the two oldest candidates ever against each other with perhaps the state of democracy in the balance! (ok maybe that is a bit much), temperatures around the world warming, a new race to the moon in the making with a 18 year old in the driver’s seat!
As always, we are here to help guide your financial lives through these times and it is our honour and our pleasure to do so.
On behalf of David and Hayleigh and myself please enjoy what is touted to be a very mild fall. We look forward to Q4 and to the holiday season.


Yours sincerely,

 
Matt Smith
Associate Portfolio Manager                           

 



It’s a privilege to assist you and your family.


 

                   



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