Market Insights: Milestone Recession Risk™ Composite Update

Macroeconomic and Market Developments:

• Equity markets in North America were mixed this week. The TSX Composite index in Canada was up 2.06%, however US markets were slightly lower with the Dow Jones down 0.74% and the S&P500 index down 0.78%.
• The Canadian dollar was up slightly this week to 76.4 cents from 76.1 cents last Friday.
• Gold fell slightly again this week, falling from $1,887 to $1,870 this Friday.
• North American oil prices moved up again this week. US WTI jumped from roughly $40.00 to roughly $42.50 this Friday. Canadian WCS rose just slightly to finish at roughly $29.50 this week.
• US-based Moderna announced on Monday that preliminary phase three trial data shows its vaccine is more than 94% effective in preventing Covid-19. The analysis evaluated 95 confirmed Covid-19 infections among the trial’s 30,000 participants. CEO Stephane Bancel called it a “game changer.” In related news, on Wednesday, Pfizer and BioNTech announced their vaccine proved 95% effective in final analysis of Phase 3 trial. The companies also plan to submit for emergency use authorization with FDA within days.
• Canadian miner Teranga Gold (TGZ) is being bought by Britain’s Endeavour Mining Corp in an all-stock transaction worth about $2.44-billion. Endeavour has six mines in Burkina Faso and Côte d’Ivoire, while Toronto-based Teranga has two mines in Senegal and Burkina Faso.
• On Tuesday, S&P Dow Jones Indices announced that they will be adding Tesla (TSLA) to the S&P500 Index. At the company’s current valuation of roughly US$470 billion, it will be among the S&P’s 10 largest companies. This inclusion will lead to billions of dollars worth of Tesla shares changing hands as index managers buy the stock.
• British insurance group RSA has accepted a 7.2 billion pound ($9.55 billion) cash offer from Canada’s Intact Financial and Denmark’s Tryg. Tryg would pay 4.2 billion pounds while Intact would contribute 3 billion pounds, with the overall offer representing a 51% premium to RSA’s Nov. 4 closing share price of 460 pence.
• On Thursday, West Fraser Timber (WFT) and Norbord (OSB) announced that they have entered into a strategic business combination in which West Fraser will acquire all of the outstanding shares of Norbord in an all-stock transaction valued at ~C$4.0B (US $3.1B). The price represents a 13.6% premium to the closing price of Norbord's shares on the TSX on the previous day. If the deal completes, current West Fraser shareholders will own ~56% of the company, with current Norbord shareholders owning ~44%.
• In Canadian economic news, September retail sales came in at +1.1% crushing street consensus of +0.2%. Statistics Canada is providing an advance estimate of retail sales, which suggests that sales were relatively unchanged in October. Additionally, StatsCan published October inflation that rose 0.7% y/y from a 0.5% increase in September, led by higher prices for food. The agency added that on a seasonally adjusted monthly basis, the CPI rose 0.3% in October.
• Total COVID-19 cases around the world continued to climb this week. Total cases now stand at approximately 57.3 million with total deaths at approximately 1.37 million. In Canada, the total case count now stands at 315,751, with active cases at 52,193. In Alberta, total active cases now stand at 10,382.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker: COVID TRACKER

Chart of the Week:

Today we wanted to share with you a fascinating long-term market trend that you may not be aware of. Over the last 25+ years, more than 100% of the S&P 500’s returns have occurred outside of regular trading hours. As the following chart illustrates, using the SPDR S&P 500 ETF (ticker: SPY), we can break out the performance of the market from the opening to the closing bell and also from the close of markets to the next day’s open. In both case, this can be calculated by using the opening and closing prices. This chart shows the cumulative performance of the regular hours (red line) and overnight hours (green line) strategies going all the way back to SPY’s inception in 1993.

If you had bought at the opening price and sold at the closing price each day, your cumulative return would have been -10%. On the other hand, if you bought at the closing price and sold at the next opening price each day, the return would be an enormous 812%! This doesn’t even factor in dividends, which would add substantially more gains to overnight holders than if you sold at the close each day.

What explains this wide performance disparity? Most likely, in our view, the biggest factor involves the basic principles of risk and return. While there isn’t a lot of risk involved in holding equities during regular trading hours on any given day as you can exit at any point in time, holding overnight when trading is closed involves a lot more risk. This was put on spectacular display this past March, when markets opened down 10% on two different occasions. In fact, about two-thirds of the sharp ~35% price decline in the index we witnessed in March occurred after trading hours. Are these trading moves as depicted in this chart realistic? No; however, to some extent it illustrates an important point of being in the market than timing the market, and it certainly makes the case as to why it is rare to find a rich day trader.

               Source: Bespoke Investment Group LLC

Lastly, we discuss our Milestone Recession Risk™ (MRR) Composite repeatedly in our quarterly commentaries in our review meetings. However, we wanted to provide an update on this as markets have taken a bit of a pause this week. Currently, our MRR Composite stands at 6.5/10 which is right at the amber limit and close to moving into the green zone. We will be monitoring this closely as we head into the winter season. If you would like more details on any of the components of our Composite - which ones are flashing red, amber or green - please don’t hesitate to inquire.

Milestone Recession Risk™ (MRR) Composite: 6.5

 

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