2020 will certainly go down as one for the history books. From record highs that suddenly slammed into a pandemic-induced recession triggering the fastest bear market in history, immediately followed by perhaps the quickest market recovery in history. The difference between money made (or protected) or money lost, often came down to which week during the turmoil an investor traded.
Looking back six months ago, we noted in our report that the setup for 2021 appeared ‘challenging’. Well, ‘challenging’ it was not.
With the severity of the pandemic, vaccinations in early days and valuations at exorbitant levels, one would estimate that was a fair
statement. An unbelievable run on equities so far this year has the markets defying everything from rising inflation to COVID-19
variants, with valuations in the nosebleed levels. No one can predict the future, but looking at chart 1, wouldn’t you agree that this
looks a little ‘too easy’? However, if equities were a worry six months ago, we would say the paranoia of a pullback continues to
Growth has been the dominant style for the U.S. equity market for pretty much all of the 2010s. Based on the S&P 500 style indices, growth beat value in every year from 2007-2020 with the exception of 2012 and 2016. That is dominance, and the cherry on top was a trouncing of growth over value in 2020 of +32.0% vs -1.4%. But in late 2020 the tide turned, and value started outperforming. All the stars were aligned for value including a sizeable valuation discount, the re-opening of the economy that would benefit value
due to the constituents being more economically sensitive, rising yields and rising inflation. And it looked like the great value rotation had started… until the last few weeks cast some doubt.
Nothing lasts forever – thankfully this includes pandemics. And while the path out likely remains a hilly road with ups and downs, people’s behaviour appears to be inching back towards normal. This is clearly good news. With each jab in the arm, we move a small step closer towards the new normal. This pandemic has obviously triggered a great number of advancements across medicine, logistics, manufacturing, etc. One of the advancements in the world of economics has been the rising use and availability of higher frequency data.
On June 24, 2021, Sun LTCI is closing to new sales as well as conversions from Sun Critical Illness Insurance. Those of us in the insurance understand why companies close products or reprice. Likely it is because the product is no longer profitable for the life insurance company. Why? Perhaps they are just having too many client’s going on claim. That is a very compelling reason to consider these products before they are gone. At the very least, you should complete the paperwork to undergo the underwriting process. You can make the final decision to purchase if/when you get an offer of insurance from Sun Life.
We do expect this inflation spike to fade as bottlenecks are resolved. However, how long is transitory? This elevated inflationary period could last longer than the bond market currently expects. Yields have remain flat, whistling past two high inflationary readings. What happens if we have a 3rd, 4th, 8th month of elevated inflation? We would bet yields will begin to rise in response.
The story for each commodity is rather nuanced and idiosyncratic. Copper is one example of a metal that could be a more durable
bull market, but the rationale behind the popularity of Dr. Copper has nothing to do with lumber prices or the price of tea in China.
No doubt it’s been a good time for commodity exposure and a healthy home country bias, but we’d question characterizing it as a
supercycle to endure for years to come. The critical aspect is that the demand surprise may not be as enduring as some expect and
we expect the supply issues to resolve over the course of the year. We still like commodity exposure given the potent structural
backdrop for real assets, but more in a tactical sense.
Over the past few months, there have been several combining factors that have helped propel the Canadian dollar (CAD)
higher and/or the U.S. dollar (USD) lower, lifting the CAD to 83 cents. This run has made the CAD the top-performing currency among the big 11 currencies so far in 2021, up 5.3% (chart 1). A move like that over five months has turned some heads, notably when investors see their U.S. denominated assets fighting this strong headwind.
Market opiners, ourselves included, have been commenting about rising inflation for a few quarters now and it’s finally started to show up in the consumer price data. Pretty much every price indicator is showing rising prices. This is evident in year-over-year measurements, which are exacerbated by depressed prices a year ago, and if you just look at price changes over the past few months. Core U.S. CPI is up about 1.4% over the past 3-months—that would be 5% annualized if the pace persisted. Year-over-year producer prices are up (+4.1% ex food & energy), with import prices at +11% at exports at +14%. If you were waiting to ‘see the whites of their eyes’ (for inflation, that is), this may be the time.
With the Xth wave of the pandemic ongoing and a good portion of the world’s population still stuck at home, you would not be alone in wondering why the economy and equity markets are doing so well.
The ‘Biden Bust’ that Trump warned us about has turned into the ‘Biden Boom’. April 28th marked President Biden’s 100th day in
office. In that time, the S&P 500 is up 8.6%. That mark’s the strongest market performance during a new president’s first 100 days
since JFK in 1961. Higher taxes you say? The markets do not seem to care.
Sometimes we can get a little overboard with our use of market personification. Though abstract and ethereal, the market can be thought of as a projection of human emotion, though it is obviously incapable of human behaviour. Keeping a pulse on the market’s mood is a rather elusive, but important part of understanding market risk or opportunity especially when it is at extreme levels.
The market moves in cycles with the two key phases being a bull market (good times) and a bear market (bad times). Determining at which point a bull market begins or ends is never evident at the key turning points. It sometimes takes many quarters or even years before all are convinced ‘that was the bottom’ or ‘that was the top’. Which brings us to the big question of this Ethos: did a new bull market start in late March of 2020 or are we in the same bull market cycle that started way back in March of 2009?
Over the past number of years there has been a deluge of new data sources. Investors no longer have to wait for company earnings or government statistics to get a sense as to what the economy is doing. This higher frequency data can help in providing an informational edge and generating portfolio insights. Whether or not that edge is still there when it’s become available to your average Joe with a Bloomberg, is another story. Regardless, we do find it useful to help track economic activity, identify trends and pattern and gauge market dislocations.
For the first half of the quarter, market participants facilitated a run of risk-on activity. The final month, however, was characterized by a pumping of the brakes on high-flying names. While the majority of markets still performed well, there has undoubtedly been a
continued divergence in equities between growth & value – more on that later.
Perhaps one of the more pressing questions for asset allocators and portfolio managers is whether or not the recent resurgence in value stocks is a true turning point or just a blip in the continued dominance of growth. It’s rare to see one style dominate for so long like growth has, with such a huge acceleration in the trend in 2020. Was 2020 a blow off top for Growth vs Value? Or has the market truly changed?
What does it mean to #FeelLikeATen? The Ten Spot thinks everyone deserves to feel like a ten all the time. it’s all about confidence. A confident woman can do anything: nail her work projects, be a domestic goddess, and look fabulous doing it.
Have you read Echelon Wealth Partners’ Canadian Entrepreneur Report 2020? It’s available here. However, if you are just looking for some quick highlights of each of our interviewed leaders and their companies, these short summaries will give you a weekly dose.
The market gyrations of holding 100% equity is simply too great for most and combining some bonds reduced the overall
portfolio volatility. This diversification, of adding various asset classes, is at the heart of modern portfolio theory and how most portfolios have been constructed.
Those four words are arguably responsible for more loss of capital than any other phrase. While certainly these can be
“dangerous” words when used to cajole the unsuspecting, markets are in fact always changing. They change because the behaviour of market participants changes. Whether the players are central bankers, active portfolio managers or a group of investors influenced by a crowd-sourcing platform, their actions constantly change and that alters how the markets function.
In honour of International Women’s Day 2021, we are highlighting our female entrepreneurs for the month of March. First up is Natasha Vandenhurk, CEO of Three Farmers. Three Farmers believes that everyone should have wholesome food to eat, an understanding of where it comes from, and how it’s made. They are real farmers, committed to preserving the land through sustainable growing practices and providing nourishing foods grown on Saskatchewan family farms.
February’s frothy backdrop was comprised mainly of (1) a successful continuation of COVID-19 vaccination administrations across
the globe; (2) patient and (seemingly) stubborn signalling from the Federal Reserve and other central banks in combination with
newly awoken hopes for additional fiscal stimulus; (3) ever-growing interest in investing from the retail community, as exhibited by
Reddit’s r/wallstreetbets user growth to ~9.3mn (+40% m/m); (4) sustained idiosyncratic pockets of speculative mispricings across a
variety of assets/securities, most notably in thematic highflying equities and cryptocurrencies; and (5) a steady rise in global yields,
followed by a last-minute inflection to pre-election highs during the month’s last week.
High valuations and rising bond yields are not a friendly environment for investors. And while that likely means correction risk is elevated, bond yields and earnings growth are moving higher for good reason. The economy is recovering and in the longer term that is very good news.
Money that flows into or out of an asset class, sector or individual company matters, sometimes a lot. Consider the fact that apart from initial or secondary public offerings or option-related issuance from a government treasury, the number of shares available for purchase in a given company is relatively stable. We are simplifying things here, but if a group of new investors, perhaps Reddit followers who just received a fresh cheque (or check) from their new President, decide to put some money into “ABC Co.”, all else being equal, the share price will rise. It will rise until enough pre-existing or new investors decide that they are willing to sell their shares given the new price. Of course, this works in both directions.
Dividend-focused investing is at the core of most Canadian investors’ portfolios, and for good reason. As bond yields grinded lower for much of the past 40 years, the quest for other sources of cash flow fed a steady stream of investors and capital into dividend-paying equities. And it has been a relatively pleasant ride, as this portion of the market has historically enjoyed good returns and less volatility than the overall TSX (a strong combo). Throw on some preferential tax treatment and we continue to believe dividendpaying equities should remain at the core of most portfolios.
It appears that we have reached a critical moment in the market cycle. Speculative froth has stretched equity markets beyond what was initially expected, with S&P 500 and TSX forward P/E ratios appearing overextended at 22.1x and 16.6x, respectively. Despite hopes for a less eventful year, we may not be party to that pleasure after all if this month is any indication of what is yet to come.
Once again we are emerging from a period of economic contraction with monetary policy breaking all previous records of just how accommodative central bankers can be. And once again there is a rising chorus of alarm about potential inflation on the horizon. Similar alarm bells were raised following the 2001-2002 bear market and the 2008 financial crisis. They also chimed in 2011 when commodity prices rose sharply, in 2013 during the taper tantrum and in 2016 shortly after Trump was elected. Each time, however, the inflationary wolf failed to materialize.
It is difficult to characterize 2020 other than to use the oft-repeated term‘unprecedented’. The past year does not fit into any historical ‘box’. The economy has been recovering and adjusting, with a lot of help from monetary and fiscal stimulus. But many millions are still out of work and many industries are struggling to get through to the other side.
At the start of the new decade, markets were fraught with uncertainty: global economic growth looked poised to slow, forecast
corporate earnings expectations were mixed, valuations were at all-time highs, and central bank accommodation had pushed credit
spreads to cycle lows. Add the uncertainty of an upcoming U.S. presidential election, correction risk was elevated with the big
question being what would trigger it. As it turned out, investors wouldn’t have to wait long to find out: the COVID-19 pandemic
served as the tail risk that changed everything!
Investing in gold, either gold producers or bullion, has never been easy. Of course we are not counting the “gold bugs” who believe anytime is a good time to buy gold. Gold investing isn’t easy because it changes so much from one period to the next. There are periods that gold is a hedge against inflation, other times a hedge against turmoil, sometimes it takes on a more speculative
ethos, sometimes a hedge against the U.S. dollar or fiat currency devaluation. Perhaps the yellow metal is more chameleon than an indestructible element.
COVID-19 has caused a global recession, reducing government receipts while triggering a policy response that is unprecedented in size and scope. There is no question this has blown a huge hole through most countries’ budget and finances. According to the IMF, the fiscal policy response to COVID-19 has been $5.9 trillion so far (as of October 2020). There has also been $5.8 trillion of liquidity support.
This year has seen an historic divergence between the economy and the stock market, and also within equity markets themselves. There is no question that the COVID-19 pandemic and the response in fighting it has unfairly impacted many industries while
many others remain unscathed or have even benefitted. This divergence has manifested in the equity markets as well, accelerating some preexisting trends and abruptly changing others. This can be seen in the contrasting performance this year of Growth versus Value stocks. To be frank, Growth has outperformed Value by more so far this year than any year in the past (indices were created in the mid 1970s).
At this point it would appear, based on the odds and the views of political “experts”, that Joe Biden will be the winner. The Senate will remain under Republican control and the House will be under Democratic control, albeit less so than before. So here are our thoughts
on the market/economic implications with the HUGE caveat that the outcomes are not final and there are likely a few curve balls ahead.
The relationship between politics and finance is closely intertwined. Every four years, we have a major convergence
when Americans head to the polls and investors try to figure out what it means for their portfolios. Canadians have a
vested interest as Canada’s economy and a large portion of diversified portfolio’s are directly exposed to the U.S.
The 2020 earnings season, much like so many aspects of 2020, is like no other. Q1 results, released in April, were partially impacted by the pandemic but it was guidance that took the real hit. The majority of companies simply stopped providing forward guidance with the legitimate excuse being “nobody knows how this progresses”.
Clearly those that can spend are spending, on durables and not services given that services spending often requires more interaction with people. The problem is that while a large portion of the economy is doing OK, a big portion is not, leading to what is being deemed a K-shaped recovery. For now, government stimulus is attempting to hold up the lower part of the “K” until a vaccine is developed, or people feel safe to become more “economically” active again. The longer this persists, the greater the risk that the lower part of the “K” drags down the upper part. If this occurs, the pandemic was just the exogenous shock that pushes us into a more traditional recession.
Canada’s energy sector has gone through a rather painful evolution over the past few years. High oil prices, oh so many years ago, unleashed a long-term global supply response during the past decade including large long-term projects and the acceleration of the U.S. shale revolution.
It was hard not to notice the excitement surrounding initial public offerings (IPOs) last week as we saw SNOW in September. In fact, IPOs are having a banner year with businesses rushing to raise capital and provide liquidity for early-stage investors given the ample appetite for speculation and new stocks. The pandemic has changed the world, and investors are looking for the leaders of tomorrow.
For those paying attention to markets this year, most would agree that 2020 has not just been an eventful year but one of record speeds. The February correction that grew into a bear market set all-time record speeds for a correction (-10% decline) and bear market (-20% decline). It took eight days from the market high on February 20 to breach correction territory and only 21 days to reach bear market territory. The market then bottomed on March 23 and started its record speed ascent. All the while it managed to avoid, surprisingly, getting the bends by rising 55% over 142 days. Within that rise, there has been a 6% one-day decline and a 7% decline over 3 days. There have also been many pretty big up days.
All things come to an end – bull markets, bear markets, economic cycles, even pandemics. And we believe that in the coming months investors should begin to increasingly position themselves for the other side of the current environment. We are not implying things will be back to normal, but they will likely be a lot more normal in six months than they are today. That means there are both opportunities and risks in today’s market, as what has worked well in the past six months may not do so in the next six.
One would think that with unemployment around 10%, you would be hard pressed to find positive economic data. This economic cycle – if we can call it a cycle – is so unique that trying to follow a regular road map for recessions is certainly challenged.
The end of 2021 nears, and it was clearly a win for investors. Although the pandemic retains its grip on humanity, economies, companies, and behaviours have adapted relatively well, in aggregate. 2022 looks like it will be a more challenging year, as some trends are poised to change, which adds uncertainty. But, there is good news too, as the global economy appears to be expanding with solid momentum.
Over the past year, equity investors would be hard pressed to find anything to complain about. Even without dividends, the S&P 500 is up 24%, the TSX has risen 19% and global equities are up 18%. Even better, periods of market weakness have proven shallow and short. Just look at the S&P 500, with six occasions that witnessed the index pull back more than 2.5%, the depth of the damage maxed out at 5%, and were often over in the span of a couple weeks. This has certainly emboldened investors to buy the dips in the market. Naturally, one of these pullbacks will develop into something more material, but, so far, the buyers of the dips have been rewarded and continue to come back in. Recency bias will bite them at some point. The TSX and global equities have similar patterns.
‘Tis the season for tax-loss selling: an annual rite of passage for both seasoned investors as well as investing neophytes. When the days get darker and the mornings a little chillier, something curious begins to occur—that reluctance to sell those losing positions that didn’t work out flips to a willingness to discard those biggest losers almost as if price become irrelevant.
So far in 2021, the S&P 500 and the TSX are both up about 25%. A truly remarkable year for equity markets that were fueled by everything from fiscal spending, MONEY PRINTING, economic recovery, the retreat of a pandemic, and a sprinkling of inflation. Making this year even more remarkable is the breadth of the advance. This is NOT just Microsoft, Apple, and Shopify pushing their respective market cap-weighted indices higher. In fact, year to date, Microsoft is ranked 74th among the S&P 500 and Apple is way down the list at 314; Shopify is 56th out of the TSX’s 230 current index members. In other words, this market advance is much broader than many of years past.
There is little doubt that at the core of most every Canadian’s portfolio is a healthy allocation to dividend-paying equities. And for many good reasons. Dividends enjoy preferential tax treatment, notably Canadian dividend-paying companies. Bond yields had been declining since the 1980s, enticing more investors to harvest cash flow from equities instead of bonds. The volatility of dividend strategies has been less than the overall market and the returns have been comparable. Cash flow, better taxation, returns, and less risk… that’s like a four of a kind in the investment world. Not to mention, when investors have ventured into growth pockets in the Canadian market, the experience has not been great. With memories of Nortel, Encana, Biovail, Potash, and Research in Motion, there has been enough boom/busts to make any investor return to the warm comfort of their dividend payers.
For months now, the U.S. Federal Reserve has been hinting that the ‘taper’ of its quantitative easing (QE) program would begin, and last week the hints turned into an operation plan. Monthly bond-buying programs that are running at $120 billion per month will be reduced by $15 billion per month. The Bank of Japan has not been adding to their balance sheet for months now, and in October the Bank of Canada announced the end of its QE program. At the same time, forecasts for overnight interest rate hikes for most developed nations continue to be brought forward. The emerging markets have already started with nine countries having raised rates in the past three months. The monetary stimulus punchbowl hasn’t been pulled away yet, but it is being drained.
Once again October proved to be a volatile month, this time to the upside as markets shrugged off earlier concerns. In this edition of the Investor Strategy we have:
- Market recap and near term outlook
- Market cycle still healthy and holding steady
- Inflation remains sticky
- Portfolio construction – a new section focused on a framework to help advisors think about, analyze and manage multi asset portfolios. In future instalments we will add our recommended tilts and dive into popular asset allocation topics. Such as:
- Where does bitcoin fit?
No, this is not a homage to one of the great hard rock bands of all-time, but we will do our best to work ‘welcome to the jungle’ into this Ethos. Instead, we are talking about little ‘g’ and little ‘r’ – two of the most important inputs for market valuations. In fact, little ‘g’ n’ little ‘r’ are so powerful, they could even justify current market valuations and provide a cautionary cue for the coming quarters. But first, when it comes to valuations for the market, price-to-earnings (PE) is certainly the more common measure. PE is a quick and easy gauge for valuation, especially contrasting with historical levels. For example, the S&P 500 is trading 21x earnings, that is high based on the long-term historical average of 16x. But this is lazy math. Price divided by earnings, whether trailing or better yet, estimates for the next 12-months, hardly encapsulates the value of a company or market. It ignores growth of those earnings in future years, variability in those earnings, leverage, or returns available in competing investments. Not implying investors should ignore PE ratios, but there are limitations.
Inflation sucks. It is essentially a tax on those consuming goods or services, as things simply cost more. Even worse, it is a regressive tax given lower income/wealth consumers tend to spend a higher portion of their income. Now, if you are sitting comfortably on your nest egg and not spending too much, should inflation worry you?