Market Insights: Market Commentary – A Secret the Investing Pros Keep to Themselves

Macroeconomic and market developments

• Equity markets were roughly flat in Canada for the week.  In the US, the Dow Jones was down slightly while the S&P500 was up slightly.
• The US markets were helped once again by strength in large tech names like Apple, Amazon and Facebook, all who released blowout earnings after the bell on Thursday.
• The price of oil was down this week, with US WTI trading around $40 and Canadian WCS trading around $28 on Friday.
• The number of confirmed COVID-19 cases in Canada rose to just over 115,000.  Globally, the total cases are over 17 million, up from 15 million last week.  In the US specifically, total cases are at just over 4.4 million, with the death toll now surpassing 150,000.
• Both the US and Canada announced GDP numbers this week.  The US estimates that their economy dropped by an astounding 32.9% annualized rate in the second quarter.  Canada, which reports GDP monthly, estimated that GDP in May increased by 4.5% from April, but will still likely be down dramatically for the full second quarter.
• In Canadian politics, the WE controversy continues to dominate the news narrative.
• In the US, the government continues to try to work out a new coronavirus relief stimulus program, but no deal has been reached yet.

What does this mean for your investments? We will leave you with a few charts that may make you go hmmm. The Exhibit below is an illustration of the impact that some of the aforementioned big tech stocks are having on the S&P 500 index in the United States. The index has been used in the past to be a proxy of the broad stock market. However, the index is increasingly becoming skewed by the mega cap tech names.  Next, we take a look at market seasonality. You may have heard the phrase “sell in May and go away” which is loosely based on historical market performance. On average, most of the gains made in a year occur from October through to April leaving the months between May to September to largely chatter sideways with a slight positive bias. As of July 28th here is the typical near term market behavior based on the market patterns over the last ten years. You would be forgiven for yawning. This is where interest and dividend income from strong companies becomes even more important. However, the next chart offers a more positive development.   Source: Bespoke Investment Group

Lastly, we have a set of three charts that reflect the current negativity in investor sentiment right now. The American Association of Individual Investors (IIAA) conducts an ongoing survey of individual retail investors to determine how they are feeling about investing at any given point in time.    The first chart shows that they have been particularly negative for a long time. The second chart shows that they are as negative as they were in the Great Recession of 2007/2008. Then you have to go back nearly 30 years to find them that negative again. 

The secret that the investment pros won’t tell you, however, is this survey data is typically a contrarian indicator. When the AAII is very bullish, you should exercise caution. When the AAII is bearish, this has often been an excellent time to take a position. The third chart shows how an investor has been rewarded in the past when sentiment is as low as it is right now (data since 1987, median returns). One year out, history suggests that we could be looking at a positive 22.57% rate of return.  

If you have read this far, you may be feeling that you should have one foot on the gas and one foot on the brake. Such is the nature of investing whereby you receive conflicting signals that you need to weigh and evaluate. One read could be that those who are bold and cease upon seasonal dips, may be rewarded in time, if they stick to their convictions. Time will tell.

Sources: CI Investments Inc., cnbc.com, Globe and Mail, oilprice.com, Bespoke Investment Group