Market Insights: Market Commentary - Value Stocks Stage a Comeback

Milestone Wealth Management Ltd. - Sep 11, 2020
Macroeconomic and market developments North American equity markets were mixed this holiday-shortened week. The TSX Composite index in Canada flat this week. US markets were lower for the second straight week with the Dow Jones down ~1.5% and the S&P

Macroeconomic and market developments

  • North American equity markets were mixed this holiday-shortened week. The TSX Composite index in Canada flat this week.  US markets were lower for the second straight week with the Dow Jones down ~1.5% and the S&P500 down ~2.5%.
  • Oil prices declined again this week. West Texas crude traded down ~$2.50 to ~$37.50, but the bigger drop was in Western Canadian Select which dropped ~$4.00 to ~$26.00.
  • Gold was up slightly to $1,950, up $9 on the week.
  • The Canadian dollar sold off somewhat this week from 76.5 cents to 75.8 cents.
  • Bloomberg reported last weekend that Saudi Arabia's Aramco reduced its key Arab Light grade of crude by a larger-than-expected amount for shipments to Asia and also lowered pricing for US buyers, the first price cut since June. Article said move was a sign Saudis see demand wavering amid more coronavirus flare-ups across the globe.
  • On Wednesday, LVMH (owner of Louis Vuitton and other luxury brands) announced that it will not be proceeding with its $16.2 billion purchase of Tiffany (TIF).  The deal would have been the largest ever in the luxury goods industry. The deal had originally been reached in November 2019, but the COVID related slowdown led to LVMH rethinking the deal. 
  • The Bank of Canada maintained its target for the overnight rate at the effective lower bound of 0.25% on Wednesday. In addition, the central bank said that it is continuing with its Quantitative Easing (QE) program, buying at least $5 billion per week in Government of Canada bonds. The BoC wrote that while recent data during the reopening phase is encouraging, the central bank will continue to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.
  • Calgary-based Husky Energy (HSE) announced this week that it will be carrying out a review of their West White Rose extension project in Newfoundland and Labrador which has been suspended due to COVID since March 2020. The company is now asking for a direct investment in the project from the provincial and federal governments.
  • Canadian-listed tech company Lightspeed POS (LSPD) successfully completed a listing on the NYSE on Friday, raising US$305 million in a US share offering.  Lightspeed offers online point-of-sale and payments products.
  • Standard & Poors announced changes to its S&P500 index earlier this week, adding Etsy, Teledyne and Catalent in place of H&R Block, Coty and Kohl’s.  There had been much speculation that Tesla would be added to the index, therefore this announcement led to a selloff in the high-flying stock this week.
  • Confirmed COVID-19 cases continued to rise this week with global cases totaling just over 28.5 million from 26.5 million last Friday.  The global death toll increased from 875,000 to 917,000.  The pace of new cases has slowed somewhat in the US, with cases just over 6.62 million (up from 6.36 million last Friday).  India now has the second highest amount of cases at 4.65 million and Brazil has 2.25 million.
  • For a deeper COVID dive, the US investment company First Trust has put out a US COVID-19 Tracker:  here 

Chart of the week

What a difference a week makes. It was just last Friday that we brought up how stretched the relative position of large cap growth versus value and the week before that the disparity of returns between mega cap growth and the rest of the market so far this year. Right on cue, the NASDAQ had corrected over 10% at one point this week, and not only that but it did so in just three days. We have been informed by a couple other portfolio managers that they believe this may have been caused by increasingly small retail investors getting overly exuberant and purchasing call options on the market. This less experienced group of investors through trading websites like Robinhood, have likely been caught ‘red-handed’ this week with their options likely to expire worthless. They will quickly learn there is no easy money in this business. However, as quick as that reversal has been, it is possible we see some further volatility as the NASDAQ is still slightly above its 50-day moving average even after the correction.

Although one would think such a quick reversal would be a bad omen going forward, Ryan Detrick of LPL research was quick to point out that in the past, this quick reversal from an all-time high doesn’t necessarily point to worse things to come. Of note, the correction we just witnessed for the NASDAQ was actually the fastest 10%+ correction from an all-time high in history. As you can see in the chart, although the forward-looking returns for the next month are not particularly good, the 6-month and 12-month returns from these fastest corrections are actually extremely positive. The market works in mysterious ways.

Although this has been a more volatile week for markets with large cap technology under pressure, we will leave you with a positive note from Goldman Sachs’ Chief Global Equity Strategist, Peter Oppenheimer. He believes this downdraft is merely a correction, the product of slowing momentum in the economic recovery lately. He argues that the bull market should resume its progress, albeit at a slower pace.

Here are the 10 reasons they believe that the rally will get going again, after this interlude, by Oppenheimer’s thinking:

  1. Market Cycle. From its trough March 23 to its peak last Wednesday, the S&P 500 jumped 60%. This is the “hope” phase of a market rebound, where optimism runs the highest and the returns are the strongest. Next comes the “growth” stage, where valuations are more muted and so is the market acceleration.
  2. Virus Vaccines’ Promise. News on their prospects is more encouraging. Goldman expects one to win regulatory approval this fall, with distribution in 2021’s first quarter.
  3. Better Earnings Sentiment. Forecasts are for negative corporate profits for the balance of the year, but upward revisions of analysts’ estimates could give the market heart.
  4. Low Bear Market Indicator. Goldman crunches a bunch of numbers—ranging from the yield curve to inflation to unemployment—to arrive at this figure, which it says portends high single digits for the next five years.
  5. Washington Commitment. The Federal Reserve’s low rates and asset buying, plus a new stimulus package likely from Congress, means that “tail risk” in minimal. That is, odds are small that the economy will be allowed to tumble into the abyss.
  6. Equity Risk Premium. This metric measures the excess return stocks need over safe Treasuries to make the risk of investing in shares worthwhile. It has been elevated for months, partly due to very low interest rates. With policymakers ensuring the economy won’t tank more, Goldman reasons, the premium should narrow, and stock investors will feel safer.
  7. Negative Real Interest Rates. With rates so tiny, adjusting them for inflation means that fixed-income investors on the short end of the yield curve are losing money. That provides an inducement to invest money into risky assets, i.e., stocks.
  8. Stocks as an Inflation Hedge. While no one anticipates any appreciable inflation in the immediate future, an uptick in the Consumer Price Index (CPI) would demonstrate that stocks tend to fare the best (compared with other asset classes) amid modestly rising prices.
  9. Stocks Pay More Than Debt. Although stock dividends have fallen, it’s not as much as interest rates have dropped. “Consider,” Oppenheimer wrote, “that 60% of US companies and 80% of European companies have dividend yields above the average corporate bond yield.”
  10. The Digital Revolution. The coronavirus has sped up existing trends, the report stated, which has driven a boom for the tech stocks. The tech names may be punished at the moment—and let’s face it, some are way overvalued—but still, “this sector is likely to remain dominant for some time to come,” the note contended.
Sources:,  Globe and Mail,,,, Canaccord Genuity, Financial Post, Calgary Herald, LPL Research, FactSet, Goldman Sachs