Market Insights: Smokestacks, Stuff & Piggy Banks

Macroeconomic and Market Developments:

• North American stock markets moved higher again this week. In Canada, the TSX Composite index was up 2.41% and in the US, the Dow Jones Industrial Average rose 4.09% and the S&P500 index was up 2.17%.
• The Canadian dollar pulled back this week, dropping from 76.6 cents to 76.1 cents this Friday.
• Gold also dropped this week, falling to $1,887 from $1,952 last Friday.
• North American oil prices moved up this week. West Texas crude jumped from around $37.50 last Friday to $40.00 this Friday. Similarly, Canadian WCS increased from roughly $28 to just over $29 this week.
• Former US Vice-President Joe Biden was declared the winner of the US presidential election last weekend. Donald Trump maintained his position that he will continue to fight; however, the markets acted as though the decision had been made. As of the end of the week, Donald Trump has yet to concede the election.
• On Monday, Pfizer (PFE) and BioNTech (BNTX) announced Monday their coronavirus vaccine was more than 90% effective in preventing Covid-19 among those without evidence of prior infection. This was great news as the White House coronavirus advisor Dr. Anthony Fauci has said that a vaccine that was 50 – 60% effective would be acceptable, and scientists were hoping for a coronavirus vaccine that is at least 75% effective.
• U.S. private equity firm Apollo Global Management Inc announced on Tuesday that it is buying Great Canadian Gaming Corp for $39.00/share. The Toronto-based company operates 25 casinos in British Columbia, Ontario, New Brunswick and Nova Scotia. The value of the transaction is $3.3-billion, which includes the assumption of Great Canadian’s debt.
• Canadian insurance company Intact Financial Corp has partnered with Denmark’s Tryg A/S in launching a $12.4-billion bid for British rival RSA Insurance Group PLC. Canada’s three biggest pension plans have confirmed they will back Intact’s takeover deal by agreeing to purchase $3.2-billion of the insurer’s shares. Late Thursday, Intact also announced it is raising $1.25 billion through a public stock offering priced at $134.50 per share and is considering issuing debt and preferred shares to fund the rest of the takeover if it is successful.
• Canadian wealth management firm CI Financial Corp announced an acquisition of New York based Registered Investment Advisor (RIA) firm Roosevelt Investment Group Inc. This is the twelfth US RIA firm that CI has purchased in the last 12 months. In addition, CI received approval Thursday from the New York Stock Exchange to list its common shares in the US beginning November 17 under the symbol CIXX.
• Total COVID-19 cases around the world accelerated this week. Total cases now stand at roughly 53.15 million and the total death toll is now at roughly 1.31 million. In Canada, the total case count increased to 282,577, with active cases at 45,034. In Alberta, we currently have 8,305 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:

This week, we saw a new all-time high for the S&P 500 Index in the U.S. on an intra-day basis. We also saw this occur in August and September. However, what we haven’t seen in a long time is a new high in U.S. small caps as represented by the Russell 2000 Index. This week’s new all-time high surpassed the August 31, 2018 mark, held for over 26 months. We also saw the S&P 500 Equal Weight Index and the Dow Jones Industrials Average hit a new high, surpassing February’s high. This is the type of breadth you want to see at new highs, which in the last while had been led primarily by U.S. large cap tech.

Looking specifically at the headline S&P 500, nearly 50% of stocks within the index hit new 6-month highs on Monday, which is a very rare occurrence. As you can see in the following chart, we have only seen readings above 45% twice in the past two decades. The reading this week was actually the highest reading in at least the past 30 years (early 1990s). This is quite incredible. These past two instances occurred at major market lows of 2003 and 2009, with the latter signaling the early innings of a new secular bull market. Will we see a similar strong bullish pattern going forward? There is no way to know, as past performance or readings are never guaranteed indicators of future returns, but based on the weight of evidence and continued frequency of record breadth readings, we would lean towards the positive side.

          Source: Steve Strazza, AllStarCharts.com

On Wednesday, we also saw an extreme reading for the “Smokestacks, Stuff, and Piggy Banks” sectors as they have led the way the past 10 trading days, all up over 10% in that period. These are the energy, industrials, materials, and financial sectors. We have been so accustomed to technology, consumer discretionary and health care sectors dominating returns for so long that this is a welcomed change of pace, and likely the primary reason we have seen the breadth we mentioned above. This reading has occurred a few times this year, as these things tend to occur in clusters as you can see in the chart below. All the red points are periods where these four sectors were up over 10% in the prior 10 trading days or two-week period going back to 1960. We will note that this data reflects daily numbers back to 1989 and weekly numbers from 1960-89. These clusters have occurred slightly before, at or slightly after long-term market lows, signaling potential strength for markets going forward.

What is a bit concerning this time around versus the prior three clusters of 1974, 1982 and 2009, is that the S&P 500 is currently trading at 27 times earnings, which is the highest of all of these periods. However, there is a reason behind this. Back in 1974 or 1982, it was trading around 10 times earnings, while in 2009 it was closer to current levels at around 25 times. The important factor for this difference is interest rates, where the 10-year U.S. Treasury yield in 1974 and 1982 was around 8% and over 10% respectively. So while multiples were much lower in those two periods compared to 2009 and 2020, they were justifiably that low given the high level of interest rates (ie. relative valuation). The 10-year rate in 2009 ranged mostly between 2.5%-3.5%, whereas this year it has mostly been in the 0.5% to 1% range, again justifying an even higher valuation to equities this year vs. 2009. With short-term rates being held down at zero by central banks for the foreseeable future, and long-term rates seemingly contained by low inflation for the time being, this environment tends to be positive for earnings growth and valuations.

                  Source: Bespoke Investment Group

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Government of Alberta, Johns Hopkins, oilprice.com, Canaccord Genuity, AllStartCharts.com, Bespoke Investment Group LLC.