Market Insights: Market Commentary

Market developments

• North American markets again moved higher on continued optimism over re-openings; all 50 U.S. states have now at least partially re-opened their economies.
• White House health advisor Dr. Anthony Fauci stated that a second wave of coronavirus is “not inevitable” if states re-open correctly, and said there’s a “good chance” a vaccine could be deployed by year’s end.
• As of May 27, new cases in the U.S. rose at a rate of 1.2%, down from 1.4% in the week prior.
• The European Union is said to be preparing a fiscal package worth more than $800 billion, and Japan is planning new economic stimulus valued in excess of $1 trillion.
• Weekly jobless claims in the U.S. were 2.1 million, passing 40 million in 10 weeks. Real gross domestic product (GDP) contracted at a 5% annualized pace in the first quarter.
• Tensions between the U.S. and China escalated as the House of Representatives passed legislation calling for sanctions against Chinese officials.

How does this affect my investments?

When we look at the big picture, there are reasons to be positive in the long run. The charts below illustrate that the current dividend yield on stocks is very attractive when compared to government bond yields. The first chart compares U.S. stocks (S&P 500) to U.S. 10-year Treasuries, and the second chart shows that the difference is even more substantial for Canadian stocks (TSX Composite) vs Canadian 10-year bonds.

For the S&P 500 specifically, the differential between equity and government bond yields is now the widest since the 1940s. Although our data does not go back as far for the TSX Composite, we can safely say this is similar for Canadian equities. At some point in the future, if we see long-term interest rates start to climb again, we could see massive inflows from government bonds into dividend paying stocks.

Sources: S&P, BofA US Equity & Quant Strategy, @Callum.Thomas, @FrankCurzio

 

Source: Meng Gao, Canaccord Genuity, Bloomberg

This is not meant to be a commentary on the short-term outlook or a prediction on how North America’s return to normal will progress. However, it does show that by this measure, the market is not especially overvalued at this point.

Ultimately, as discussed in previous letters, we would highlight the importance of sticking to your long-term plan, despite current market conditions. The partial recovery we have seen since the recent market lows illustrates why we stick to our process.

Sources: CI Investments Inc., Bloomberg Canada, cnbc.com.