Volume 24, Issue 29 July 13, 2020.

  Source: Globe & Mail


Has the Equity Market Been Vaccinated?
Robert Kavcic
BMO Senior Economist

Equity markets went about their business this week, seemingly ignoring some accelerating pandemic curves across various U.S. states. Remember the bad old days, when the equity market would hang on to every daily COVID update, and trade accordingly? Well those days are seemingly behind us, even as a second wave of the pandemic (or increased testing, spread to broader groups, or whatever the case may be) looks to be oncoming. The Nasdaq pushed further into record territory this week, and is now up more than 50% from its March low. In fact, if you departed out to sea on February 19th (the prior high), you’d return to find your Nasdaq ETF up a pedestrian 7%, as if nothing really happened while you were gone. But, of course, how the world has changed… it’s just not reflected in an index dominated by names like Apple, Microsoft, Amazon and Intel, the likes of which have probably benefited from the massive shift. Meantime, China’s equity market has gone almost parabolic since late June, in what looks like a budding replay of a localized bubble last seen through early 2015.
 
Of course, you’d also have missed the historic 22 million U.S. job losses, but the bulk of those have been spread across Main Street, not at the heart of the equity market.  The first sign that something might be amiss is that your small-cap holdings have curiously shed more than 20% of their value since you left. In fact, the last time we saw the Nasdaq so inflated relative to S&P small caps was in 2000, just as the tech bubble was unwinding. This time, however, it reflects the deep and likely persistent economic impact of the pandemic as you move down the spectrum into smaller businesses. While there was precious little market-moving economic data in the U.S. this week (and probably a net negative in terms of news flow when COVID cases are considered), massive monetary stimulus and potentially more fiscal stimulus are still lending support.
 
Meantime, the TSX was little changed on the week, despite a flurry of new information on the fiscal situation, and the economic recovery. On the latter, both housing starts and employment strongly topped expectations in June, but the TSX is never one to trade on domestic economic data. Rather, the index has largely held its own with the S&P 500 over the past week, month and quarter, but is down 6% on the year versus a 5% gain south of the border—the energy sector has been a big factor in the TSX's underperformance. That said, WTI remained little changed on the week at just above $40 and, while U.S. production has firmed in recent weeks, the 15% decline since mid-March has helped put a floor under that market.
 

Have a great week.

Frank & Mark.




Source: Globe & Mail, BMO Capital Markets, Bank of Canada

Canada:

The TSX was little changed on the week, despite a flurry of new information on the fiscal situation, and the economic recovery. On the latter, both housing starts and employment strongly topped expectations in June, but the TSX is never one to trade on domestic economic data. Rather, the index has largely held its own with the S&P 500 over the past week, month and quarter, but is down 8% on the year versus a small dip south of the border—the energy sector has been a big factor in the TSX's underperformance. That said, WTI remained little changed on the week at just above $40 and, while U.S. production has firmed in recent weeks, the 15% decline since mid-March has helped put a floor under that market.YTD, the TSX is down 7.9% and the benchmark 10-year yield ended the week to yield 0.54%.

U.S.:
In the U.S., the Nasdaq pushed further into record territory this week, and is now up more than 50% from its March low. In fact, if you departed out to sea on February 19th (the prior high), you’d return to find your Nasdaq ETF up a pedestrian 7%, as if nothing really happened while you were gone. But, of course, how the world has changed… it’s just not reflected in an index dominated by names like Apple, Microsoft, Amazon and Intel, the likes of which have probably benefited from the massive shift. Meantime, China’s equity market has gone almost parabolic since late June, in what looks like a budding replay of a localized bubble last seen through early-2015.  YTD, the S&P 500 is down 1.4%, the Dow Jones Industrials are down 8.6%, and the Nasdaq is up 18.3%. The yield on the 10 year Treasury closed at 0.65%.




Source: BMO Capital Markets 

The Good:  Employment +952,900 (June); Jobless Rate -1.4 ppts to 12.3% (June); Average Hourly Wages slowed to +7.3% y/y
(June)—but still high; Housing Starts +8.3% to 211,681 a.r. (June); Ivey PMI +19.1 pts to 58.2 (June).


The Bad: BOS Indicator -6.49 pts to -7.00 (Q2)—lowest since 2009Q1; Ottawa’s Budget Deficit balloons to
$343.2 bln (FY20/21).