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).