Market Insights: The Call of the Loon

Macroeconomic and Market Developments:

• North American stock markets were positive this week. In Canada, the S&P/TSX was up 2.56%. In the US, the Dow Jones was up 4.07% and the S&P 500 was up 2.63%.
• The Canadian dollar moved higher again this week, finishing above the 80 cent mark at 80.2 cents from 79.0 cents last Friday.
• Oil prices were mixed this week, with US West Texas crude finishing down slightly at $65.60 from $66.25 last week. The Western Canadian Select price finished at ~$55.00, up from ~$52.50 last week.
• Gold prices recovered somewhat this week, finishing at ~$1,723 from ~$1,696 last Friday.
• Last weekend, the US Senate approved the Democrats’ $1.9T coronavirus relief package. The legislation would provide $300 in weekly unemployment benefits through September 6th, send $1,400 direct payments to many Americans, direct $350 billion to state and local governments, fund vaccine distribution and expand the child tax credit. The stipulation of raising the nationwide minimum wage to $15/hour was dropped from the package. The bill then made its way back to the House of Representatives to approve the changes before going in front of President Biden for final signoff on Thursday.
• On Tuesday, two Calgary-based companies announced plans to merge. Secure Energy Services (SES) and Tervita Corporation (TEV) announced an all-share merger with implied total enterprise value of ~$2.3 billion. The combined company will trade under the symbol SES and upon completion of the transaction, Secure and Tervita shareholders will own approximately 52% and 48%, respectively.
• US inflation data came out on Wednesday morning showing that inflation is still in check. The Consumer Price Index (CPI) came in at 1.7% year-over-year which was within expectations, but less than some had feared as illustrated by bond interest rates rising so aggressively in the past month.
• On Wednesday, the Bank of Canada held its target for the overnight rate at the effective lower bound of 0.25%, with the Bank Rate at 0.50% and the deposit rate at 0.25%. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week.
• The extremely popular gaming app Roblox completed its IPO on Wednesday, listing on the NASDAQ index under the symbol RBLX. The IPO price was US$45.00 and the stock closed its first trading day at $69.50. The past year has seen explosive growth for Roblox, with millions of kids stuck at home during COVID spending more and more time on the platform.
• On Friday, Statistics Canada reported that Canada gained 259K jobs in February, beating consensus estimates of a 75K increase and topping even the most optimistic forecasts. Agency noted both part-time (+171,000; +5.4%) and full-time (+88,000; +0.6%) work increased. The unemployment rate fell 1.2% to 8.2%, vs 9.2% consensus estimates, the lowest rate since March 2020.
• Total global cases of COVID-19 finished this week at 118.8 million, with the total deaths at 2.63 million. In Canada, total cases now stand at 899,757, with active cases at 30,672. In Alberta, total cases are 137,137, with active cases of 4,488.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker. Click here: COVID TRACKER

Charts of the Week:

The Loonie has been strengthening for quite some time now and is starting to receive some attention. It really broke out in early December to a new 2 ½ year high against the US dollar, moving above heavy chart resistance at around 77-78 cents US that had previously kept a lid on the Loonie since May of 2018. Since December, its rise has continued and has now touched 80 cents for the first time since February 2018. Today, it looks set to close at a new 3-year high. If we were to see our dollar rise to 83 cents US, that would make it the highest we have seen in almost 6 years. For many years dating back to early 2015, the Canadian dollar has been undervalued relative to the Greenback based on Purchasing power parity (PPP). If you are unfamiliar with PPP, it is a popular macroeconomic analysis metric to compare economic productivity and standards of living between countries. It compares two different countries’ currencies through a “basket of goods” approach. The theory states that two currencies are in equilibrium when this basket of goods is priced the same in both countries, taking into account the exchange rates. As you can see below, the Loon is calling to say “I’m back”, as it has just recently risen above that line that delineates whether our dollar is under or overvalued against the US. If this continues, it will certainly prove more cost effective for Canadians to travel to the US or purchase products from there.

                           Source: Bespoke Investment Group

The other topic we wanted to highlight this week is that ‘value’ stocks have been trouncing ‘growth’ stocks of late, especially since February 12th. From that point in time, the US Russell 1000 Growth Index is down almost 6% compared to the Russell 1000 Value Index being up almost 5% for an 11% relative swing. In our Charts of the Week back on September 11th and 18th, we discussed how value stocks might be staging a comeback vs. growth stocks. It was at that time that we mentioned that the 11-month streak of US large cap growth outperformance was ending, the longest such streak in over 20 years. When long-term trends change, one needs to take notice.

Fast forward to today. Here is an updated chart comparing these two US indices. The strong rally in large cap growth stocks (Facebook, Apple, Amazon, Alphabet, Microsoft, etc) from the March 2020 lows has run out of steam. There was a big push by value stocks in October, but it was simply an upward outperformance over growth (moving higher a faster pace the growth). However, since mid-February, we have now witnessed a complete diversion, with one rising strongly, and the other falling resulting in growth lagging its value counterpart by a wide margin.

                        Source: Bespoke Investment Group

The next chart illustrates that last point by looking at the six-month performance spread of growth vs. value. When the blue line is above the red line, growth is outperforming value, and the opposite when it is below the red line. At one point earlier this month, this performance gap widened out to -16% which is the largest we have seen in almost 20 years. This type of outperformance by value stocks over growth is certainly rare. In fact, there have only been five other periods in the last 30 years where growth has underperformed value by 10% or more in a 6-month span. These periods were in 1992, 1993, 2000, 2002 and most recently in August 2009. In these past instances, in the short-term we usually saw growth show a bounce relative to value over the first one to three months, but looking further out, value tended to outperform growth by a median amount of 0.5% over the following six months and 1.9% over the following one year. If we were to see a similar situation this time, what that would mean is that value stocks have probably already had their biggest push relative to growth, but that it may also continue to slightly outperform growth the rest of this year as well. What is certainly indicates to us is that active stock selection has become more important than some recent years.

                 Source: Bespoke Investment Group

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Johns Hopkins University, oilprice.com, Canaccord Genuity, Tony Dwyer, Bespoke Investment Group, Investopedia, Bloomberg, Connected Wealth