Market Insights: Market Commentary - Comparing the market’s recovery in 2009 vs. 2020
Milestone Wealth Management Ltd. - Sep 04, 2020
Macroeconomic and market developments This week saw North American equity markets fall, giving up last week’s gains. The TSX Composite index in Canada was down ~2.5%, whereas in the US, the Dow Jones Industrial Average was down ~2% and the S&P500 was
Macroeconomic and market developments
- This week saw North American equity markets fall, giving up last week’s gains. The TSX Composite index in Canada was down ~2.5%, whereas in the US, the Dow Jones Industrial Average was down ~2% and the S&P500 was down ~2.5%.
- Oil prices also declined this week, with US WTI crude trading down ~$3 at ~$40. The Canadian WCS price was volatile during the week, but finished roughly flat again this week at ~$30.
- The Canadian dollar was volatile this week, but ended up approximately even at 76.5 cents, compared with 76.3 last Friday. Gold was down this week, declining from $1,971 to ~$1,941.
- In Canadian corporate news, US telecommunications giant Altice USA Inc (ATUS) launched a takeover bid for Canadian based Cogeco Inc (CGO) and Cogeco Communications (CCA). The deal includes a provision that the Canadian operations would be then sold to Rogers (RCI.b). However, the deal faces hurdles as the controlling shareholder, the Audet family, has said it plans to reject the offer.
- In oil and gas news, this week Whitecap Resources (WCP) announced a deal to buy NAL Resources Ltd for $155 million from Manulife Financial. Additionally, Obsidian Energy Ltd (OBE) released a letter proposing a merger with Bonterra Energy Corp (BNE).
- In an effort to support the labour market and broader economy, U.S. Federal Reserve (“Fed”) Chairman Jerome Powell announced a major shift to “average” inflation targeting. This means the Fed will allow inflation to trend moderately above the 2% target to offset extended periods of below-target inflation.
- A partnership between China and Canada to carry out Canada’s first clinical trial of a potential COVID-19 vaccine was abandoned amid tensions between the two countries. However, there are a number of other vaccine candidates in development around the world. In August, Canada announced deals to reserve millions of doses of potential vaccines from U.S. pharmaceutical firms Moderna, Pfizer, Johnson & Johnson and Novavax.
- In August, the Canadian economy added 245.8K jobs vs consensus of over 250K. The unemployment rate was 10.2% vs consensus estimates at 10.9%. Statistics Canada noted that August gains, combined with the addition of 1.2M in May and June, brought employment to within 1.1 million (5.7%) of its pre-COVID February level.
- Jobs numbers for August were also released in the US, which saw nonfarm payrolls increase by 1.37 million in August and the unemployment rate fall to 8.4% as the U.S. economy continued to climb its way out of the pandemic downturn.
- The Canadian July trade balance showed a $2.5B deficit vs consensus of a deficit of $3.5B. Statistics Canada reported that global reopening led to more imports and exports, with imports +12.7% and exports +11.1% in July. As expected, motor vehicles and parts were the largest contributors.
- The number of confirmed COVID-19 cases stayed on its recent upward trend. Total global cases are now at just over 26.5 million with total deaths at roughly 875,000. The US has over 6.36 million cases and approximately 191,500 deaths, with Brazil at approximately 4.05 million and India at roughly 4.01 million cases.
- For a deeper COVID dive, the US investment company First Trust has put out a US COVID-19 Tracker: here
Charts of the Week
We have written a fair amount recently about the disparity between the S&P 500 Index, which is market-weighted, vs. the S&P 500 Equal Weight index, which reflects the average return of the U.S. equity market. Here are two charts that show just how stretched growth stocks has become in comparison to value stocks. The correlation between the two has recently collapsed and is almost as low as it has ever been over the last thirty years. Remarkably, in the last six months, the difference in return on U.S. growth stocks to value stocks is the highest it has ever been. In our view, there is a very high likelihood that we will see some mean reversion of this over the balance of this year, which should benefit our portfolios on a relative basis.
We also wanted to highlight a very noticeable U.S. stock market pattern that has appeared this year, which is showing many similarities compared to 2009. We are hopeful that this continues into 2021.
We also wanted to highlight a very noticeable U.S. stock market pattern that has appeared this year, which is showing many similarities compared to 2009. We are hopeful that this continues into 2021.
In both cases, the market bottomed out in March (only two weeks apart), both rose in a similar fashion into June (both in the 40-45% gain range off bottom), both consolidated into June-July (with the June peak almost the exact same day), and both rose 50% off the low in mid-August (again, almost the same day). Looking even at this week, so far it is like the ~5% drop that occurred in the same first week of September 2009. Right on time. We have seen some air coming out of large cap Tech in the U.S. the last couple of days. In 2009, we did have a series of 3-7% declines over the back half of the year, which were all followed by gains. One can notice that each of these declines had a lower low. We are currently in our first pullback this quarter, so if the same pattern continues to hold this year, we could expect some more volatility. One can even see some volatility in late October and early November in 2009; perhaps this lines up with the upcoming U.S. election. Yet, although we are cautious in the short-term, we believe the intermediate and longer-term trends are positive. As we have witnessed perfectly in the second quarter of this year, history continues to show it is best not to panic when volatility appears. Volatility like we are seeing this week is a normal occurrence in markets; what is important is staying invested and sticking to a long-term investment process that we adhere to.