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.
Currently, we would suggest investors tilt more towards
active. Even the very efficient S&P 500 is now riskier
than normal given a handful of names carry such a
large weight in the index. Recent trends may continue
but at some point they will reverse. And given the
weightings, that will not be pleasant for some of the
If in March of this year you were asked to predict where equity markets would land at the end of the third quarter, your
answer would likely have fallen off the charts. We’re nine months into the new decade, and despite the continued
economic uncertainty stemming from the COVID-19 pandemic, equity markets still managed to post a second quarter of
consecutive gains in 3Q20 on the back of 2Q20’s strength. Most other asset classes continued to recover as well, in large
part attributable to optimistic re-opening efforts, sustained monetary easing from the world’s central banks, and
aggressive fiscal stimulus measures which have helped buoy economic activity.