Market Insights: Amazing Triple Plays, Investors Yawn

Macroeconomic and Market Developments:

• North America markets dropped sharply this week with the TSX Composite down 4.33%. For US markets, the S&P500 fell 5.60% and the Dow fell 6.44%.
• The Canadian dollar also dropped this week, falling to 75.0 cents from 76.1 cents last Friday.
• Natural gas prices have had a nice run lately, with the NYMEX (New York) price up to US$3.36 this Friday (for the December 2020 futures contract) compared to roughly US$2.70 a year ago at this time. This is its highest level since January 2019.
• Oil prices also dropped sharply this week, with US West Texas crude falling from approximately $40 to approximately $35.50 this week. Similarly, Canadian WCS dropped dramatically from approximately $30 to approximately $25/barrel this week.
• Gold dropped slightly this week to $1,878 from $1,904 last Friday.
• Last Sunday, Cenovus (CVE) announced a deal to take over Husky (HSE) for $3.8 billion, plus assuming Husky’s $5.2 billion in long-term debt. The deal will create Canada’s third largest oil and gas producer behind Canadian Natural (CNQ) and Suncor (SU) and make Cenovus the country’s second largest upgrading and refining operation after Suncor.
• This past weekend also saw a snap election in BC. John Horgan’s previous minority NDP government has been re-elected as a majority. The Green Party earned three seats but loses the balance of power that it had held for the past 3.5 years during the NDPs minority government.
• The overarching story for the markets this week was the worsening COVID situation around the world. France and Germany announced further lockdowns due to escalating COVID-19 cases. In France’s case, the new restrictions will mean people have to stay in their homes except to go out and buy essential goods, seek medical attention, or exercise. People will be allowed to go to work if their employer deems it impossible for them to do the job from home. However, for now, both countries have left schools open.
• The Bank of Canada announced on Wednesday that it will reduce its Canadian government bond purchases to $4-billion a week while shifting more of its purchases to longer-term bonds. The Canadian central bank also said that it is keeping its key policy interest rate at 0.25% and reiterated its pledge to keep the rate at this level “until economic slack is absorbed so that the 2-per-cent inflation target is sustainably achieved.”
• On Thursday, The US Commerce Department reported that U.S. GDP accelerated at a 33.1% annualized pace in the third quarter, better than the 32.0% that was predicted. A surge in business and residential investment along with stronger consumer activity helped the economy after its worst-ever quarter in Q2
• Thursday was a big day for earnings in the US, with Apple, Amazon, Alphabet (Google’s parent company), Facebook and Twitter all reporting earnings. While all the earnings were very positive, only Alphabet’s earnings were enough of a blowout to move the stock significantly higher. Apple reporting disappointing iPhone sales, however, this is largely because of the delayed launch of the iPhone 12 which normally would have occurred in September, but this year was in October.
• Statistics Canada reported August GDP increased by 1.2% month over month, following July's 3.1% increase. This was slightly above consensus which was +0.8% and its own early estimate for +1.0%. The agency provided an early reading for September of +0.7%,pointing to a 10% increase in real GDP in Q3.
• The global COVID-19 cases accelerated this week, with total cases now at approximately 45.3 million and total death toll increasing to 1.18 million. Total cases in Canada increased to 228,542, with active cases now at 27,259 and death toll at 10,074. In Alberta, we currently have 4,921 active cases.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker: COVID TRACKER

Charts of the Week:

With the biggest talking point right now being the U.S. Election this Tuesday, we thought we would share this chart which shows the forward-looking performance of the U.S. stock market after an election with the four different possible Presidential scenarios. Only the dark blue line and the grey dotted lines are in play this go-round. This chart is over a very long period of time, with many periods that do not remotely resemble the world we live in today, so this is really for interest only and we do not put much weight on its predictive abilities.

   Source: Mike Zaccardi

We are now just over halfway through the Q3 earnings season, and so far, 85% of companies have beat expectations by an astounding 19% on average, well above the historical average beat rate in the 3% to 5% range, according to The Earnings Scout. In addition, over the past 90 days, 15% of companies have raised guidance, the most since 2014.

As the following chart illustrates, we are also seeing a new 18-year record percentage of companies (13%) that have reported what the astute Bespoke Investment Group call a “Triple Play”, where companies beat expectations on both earnings and revenue, and also raise earnings/revenue guidance.

       Source: Bespoke Investment Group

Although this is all very positive, it just hasn’t translated into the typical positive price reaction you would normally see following this type of situation. Right now, we are only seeing 46% of companies have a positive price reaction to their stock after announcing results, well below the long-term average. There could be many reasons why this is occurring, perhaps earnings/revenue expectations have been so high that it is difficult for companies to surprise to the upside, however, it may be more likely that it has to do with the current backdrop we are in. With COVID cases on the rise, the reopening narrative could be in trouble, jeopardizing the projected economic numbers which could put some pressure on future earnings/revenue for companies unless we see more good news on the treatment and vaccine front. We are also still seeing a lot of companies decline to provide guidance, something we have seen a lot of now for the last three quarters, providing some uncertainty for investors. We also have a big election in the U.S. just ahead. Although these remain uncertainties, the underlying trend of recovering earnings growth and better than expected results from the vast majority of companies continue to show how resilient the U.S. consumer is.

Closer to home, we thought we would end with what can be viewed as a positive for Alberta and for the local economy. The blue bars below are the current Natural Gas Futures pricing, and the yellow line is where they were one year ago. This is a huge improvement.

Source: GasAlbertaInc.

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Government of Alberta, Johns Hopkins, oilprice.com, Canaccord Genuity, Bespoke Investment Group, BofA Global Research, Bloomberg, Global Financial Data (GFD), GasAlbertaInc., The Earnings Scout