Market Insights - Market Commentary

Milestone Wealth Management Ltd. - Jun 19, 2020
Market developments After pulling back last week, North American equity markets advanced, with optimistic economic announcements and a potential COVID-19 treatment outweighing “second wave” fears. Oil was up this week, with WTI finally recapturing

Market developments

  • After pulling back last week, North American equity markets advanced, with optimistic economic announcements and a potential COVID-19 treatment outweighing “second wave” fears.
  • Oil was up this week, with WTI finally recapturing the $40 level on Friday, with Canadian WCS oil trading around $28.  Whereas these levels are still low, they are a big improvement from where they bottomed out just a few months ago.
  • Two major companies, Enbridge and Ovintiv (formerly Encana) announced layoffs this week.
  • Ten U.S. states saw coronavirus numbers surge more than 50% in the past week, and a new outbreak in Beijing stoked fears of a second wave in China. Scientists at the University of Oxford said that a commonly available steroid, dexamethasone, reduced deaths in patients with severe cases of COVID-19.
  • In the U.S., the Census Bureau announced that retail and food services sales were up 17.7% in May, the biggest monthly jump ever recorded. Weekly jobless claims in the U.S. were 1.5 million.
  • The U.S. government was said to be considering a $1 trillion infrastructure package to boost the economy, and U.S Federal Reserve (Fed) Chairman Jerome Powell announced that the Fed will begin to purchase individual corporate bonds.
  • Prime Minister Justin Trudeau announced that the federal government is working to extend the Canada Emergency Response Benefit (CERB) for workers who can’t yet return to their jobs, and that the government would provide a “fiscal snapshot” on July 8.
  • Statistics Canada reported that manufacturing sales fell by a record 28.5% in April and 37.1% year-over-year. Consumer prices rose 0.1% in May, but were down 0.4% year-over-year.
  • Geopolitical tensions heightened as North and South Korea, as well as India and China, engaged in separate confrontations. North Korea blew up an inter-Korean liaison office and rejected an offer by South Korea to send special envoys, while Chinese and Indian soldiers engaged in a deadly border clash.

How does this affect my investments? 

Clearly, markets have taken an optimistic view of economic and pandemic-related developments over the last few months, focusing on positive data while brushing aside most concerns. Much of that may be related to the continued willingness of governments and central banks to step in with significant support at any signs of possible distress. We saw this once again this week with the Fed’s announcement regarding bond purchases, the Canadian government’s attempt to extend CERB payments, and the prospect of the Trump administration’s $1 trillion infrastructure package.

Since late May/early June, due to a variety of technical indicators, we have expected a period of consolidation after the big run in markets from the March lows. We have seen this play out so far in early June with a 7-8% correction into this past Monday. As you can see in the charts below, the broad participation we have seen in the markets has produced two signals which in the past have been consistent indicators of above average returns going forward after a short period of consolidation. This consolidation may continue for a while longer, however, we don’t expect markets to drawdown to any great extent like in March for numerous reasons. 

The primary reasons: 

1. The Fed remains historically supportive of risk – In the past, markets have continued to move lower in bear markets as they wait for the Fed to figure out how serious the situation is. That is not the case this time, with the Fed ahead of the curve since late March with clear language supportive of growth, backstopping credit and averting any sort of credit crisis, with a historic rise in the M2 money supply and a skyrocketing savings rate. This will provide significant liquidity and spending power as the economy gradually opens. 

2. Economy is moving off worst levels – Another reason why markets continue to decline in recessionary environments is the expectation of the economy getting worse. We all know about the historic rise in unemployment, however, employment rates and continuing claims have troughed and markets do not move on what has occurred, they move on what they expect to occur. Recent economic data is clearly showing that expectations became overly pessimistic, as evidence by the Citigroup Economic Surprise Index seeing a record rise from its lows. 

3. Financial conditions are easing – Most economic data that came out over the last couple of weeks have rivalled that of the Great Financial Crisis of 2008 or the Great Depression, yet this time the Chicago Fed National Financial Conditions Sub-indices never reached even close to the levels of stress seen back in 2008, not even as high as 2011 or 2000-2002, nor many times through the 1970-1990 time frame. The current sub-indices are all currently showing continued improvement as well. 

4. Covid-19 vaccine appears closer – We put much less emphasis on this one, but we have seen many positive developments on both a vaccine and antibody drugs from companies like Moderna, Johnson & Johnson and Regeneron. As recently as last week, J&J announced they have moved up human clinical trials from September to July. The world is very focused on this, and as a result we will very likely see more rapid processes than in the past. While we don’t expect a vaccine any time soon, nor is there any guarantee of one, these positive developments will bring about a higher probability of a more aggressive reopening of economies later this year and into 2021.

Such a broad move higher is a good sign after period of consolidation:

S&P 500 after >90% of components above 10 & 50-day moving averages:

Sources: CI Investments Inc.,,,,,,,