Market Commentary for May 2020

Despite worsening economic data in May, equity markets continued to rise. The S&P/TSX closed the month over 15,000 and the S&P 500 over 3,000, representing a 67% peak to trough recovery in the US and a 62% peak to trough recovery in Canada, all this despite a dismal economic backdrop.

 

While North American economies took steps to “get back to work” with limited businesses reopening, economic data flows continue to paint a rather dismal picture of what the rest of 2020 and 2021 will look like. That being said, there are signs that perhaps the worst is over and that we have turned a corner. The higher-frequency indicators are providing us with real time data that suggests conditions are becoming less grim – still not good by any means, but not getting any worse.

 

While all this reassures us that the worst may be behind us, we are still left with question of; why have markets continue to rise despite the fact that there are now more people unemployed in the US than at any time since the Great Depression? There are several things to consider. First off, it is important to remember that the vast majority of businesses are small businesses, individually owned and operated and it is here where most of the pain will ultimately be felt. The rush back into the markets suggests that most investors believe that the impact of the shutdown will be short-lived and that by 2021, companies will return to the profitability levels they enjoyed before the pandemic. We would also draw your attention to the enormous amount of fiscal and monetary support that was made available by governments and central banks around the world. This will allow publically traded companies to refinance or issue new debt at rock bottom rates. What we have yet to see is if the majority of small businesses will be able to weather the storm on the short term government programs that have been created to help them meet payroll and pay their rent.

 

As portfolio managers, we’re wary of the disconnect and indeed we’re not alone. The recent rise in stock markets is being regarded as the “most hated rally in history” and many share in our suspicions regarding its viability longer term. Our expectation is that; over the course of the summer the markets will increasingly reflect the reality that individuals are experiencing in terms of job losses and dramatically lower economic activity. We remain overweight cash as we have been since February and will continue to take profits from short term trades when they present themselves.

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