Market Insights: One Year Anniversary for the Bulls

Macroeconomic and Market Developments:

• North American markets were mixed this week. In the US, the Dow Jones was up 1.35% and the S&P 500 was up 1.56%. In Canada, the S&P/TSX Composite declined 0.54%.
• The Canadian dollar was lower this week, finishing at 79.5 cents vs 80.0 cents last Friday.
• Oil prices were very volatile this week. West Texas crude oil closed at $60.85 compared with $61.35 last week. The Western Canadian Select oil price finished positive at ~$51.00 vs ~$49.50 last week.
• Gold prices were down slightly this week, closing at ~$1,733 compared with ~$1,744 last Friday.
• Last weekend, Canadian Pacific Railway (CP) announced an agreement to buy Kansas City Southern (KSU-US) for $275 per share in cash and stock, giving the company an equity value of $25 billion, according to Bloomberg calculations. The price represents a premium of 23% on the stock’s last closing price of $224.16. Kansas City shareholders will receive 0.489 of a CP share and $90 in cash for each share they hold, and CP will assume $3.8 billion of outstanding KCS debt. After the deal closes, KSU common shareholders are expected to own 25% of CP’s outstanding shares.
• George Weston Ltd (WN) is putting its bakery business, Weston Foods, up for sale. The food retail conglomerate intends to focus on its core businesses – grocery, drug stores and real estate. George Weston’s most valuable asset is its 54% stake in Loblaw Companies (L), Canada’s largest grocery chain by market value, and its 17% of Choice Properties REIT (CHP.un), the country’s biggest real estate trust by market value, which owns retail properties and residential developments.
• On Wednesday, the Suez Canal, the important shipping route connecting the Mediterranean Sea and the Red Sea, became blocked as a container ship ran aground on one bank of the canal. The Suez Canal is used to transport oil, natural gas, and cargo accounting for about 10% of the world’s trade. Estimates suggest it will take several more days to free the ship and restart traffic through the canal.
• US economic growth was revised upward in the fourth quarter, beating consensus expectations. Real (after inflation) GDP grew at a 4.3% annual rate in Q4 versus a prior estimate and consensus expecting 4.1%. The upward revision was mainly due to higher inventories than originally thought, which more than offset small downward revisions for consumer spending and business investment. However, for the full year, real GDP was down 2.4%.
• On Thursday, Telus (T) announced a stock offering for C$1.3 billion at a price of C$25.35/share, a discount of 3.4% below its closing stock price of C$26.24. Telus said it will use the proceeds to speed up its investments in its fibre-optic broadband infrastructure in Alberta, British Columbia and eastern Quebec, and to accelerate the rollout of its national 5G network.
• Total global cases of COVID-19 finished this week at 125.9 million, with the total deaths at 2.76 million. In Canada, total cases now stand at 951,562, with active cases at 38,922. In Alberta, total cases are 144,311, with active cases of 6,835.
• 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:

This past Tuesday the 23rd marked the one-year anniversary of the bear market bottom on March 23, 2020, and what a round trip it has been! If we look at the iShares MSCI World Index ETF, a good representation of the entire developed equity markets in the world, it dropped an eye-popping 27.5% from the Feb 12, 2020 to March 23, 2020 on a closing basis in Canadian dollars. The S&P/TSX Composite dropped even more, -37.4% to be exact, but over only 22 trading days. The S&P 500 Index fell almost 34% in US dollars. It was one of the sharpest drawdowns that this generation of market participants has ever witnessed. Those numbers to this day are still shocking to look at. However, this story has a happy V-shaped ending to it. The markets rebounded strongly and recovered to new highs after the strongest first year to a new bull market ever, even stronger than the year after the 2009 bottom. This week marks the beginning of year two of the current bull market. The good news is that looking at the six prior 30% or greater bear markets since WWII for the S&P 500 Index, year two was higher every single time. In fact, the average has been 16.9%, well above a normal one-year period. There have been double digit pullbacks during this period as well on average, so being nimble and active will still be important. Keep in mind, the average length of a bull market is around five years, so from that perspective it’s not crazy to think that the current bull market could continue in 2021 and beyond.

Source: @RyanDetrick, LPL Research

On the other hand, times have not been so great for long-term government bonds, especially this past quarter. Here is a look at the S&P 500 Index compared to the Merrill Lynch 10+ Year US Treasury Index, which had declined 12.7% YTD through this past Monday’s close on a total return basis. Recall, long-term US treasuries, or long-term Canadian government bonds for that matter, are supposed to be the safety net of a balanced portfolio. However, this illustrates just how volatile long-term government bonds can be when interest rates make violent moves on a percentage basis like we have recently witnessed. Even with a bit of a bounce this week, the index is set up to decline by well over 10% in the first quarter. This is only the second time in the last 35 years where this index has finished a quarter with a double-digit loss, the other time being the second quarter of 1987 which was right near the beginning of the secular bull market in bonds. Perhaps this secular trend has now ended, only time will tell. We would have to see the US 10-year treasury yield push past 3% for that 30+ year long-term bull market for bonds to be considered over. The 10-year yield is currently at 1.66% (Canada’s is at 1.50%), but this is a far cry from the 0.4% low it hit in early March 2020; although that is only a 1.26% rise, it works out to a 315% rise in percentage terms.

Source: Bespoke Investment Group

We wanted to finish off by looking at volatility and what could be viewed as a significant sentiment shift in the markets. The most closely watched measure of volatility is the CBOE Market Volatility Index, also known as the VIX. The last two weeks we have seen the index shift form a high-volatility regime period to a low-volatility regime. Generally, market participants view the 20 level as the line in the sand between these periods. The chart below is a week old, but the VIX index has since closed below 20 three more days, and today marks the first weekly close below 20 (closed at 18.86 today) since it gapped up from 17 to 25 on February 24, 2020. These regimes do tend to persist for lengthy periods, so hopefully that will be the case this time around as well.

Source: @StocktonKatie, Fairlead Strategies

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Johns Hopkins University, oilprice.com, Canaccord Genuity, Tony Dwyer, Wealth Professional, Bespoke Investment Group, Chicago Board of Options Exchange, Bloomberg Finance LP, Refinitiv, LPL Research, Fairlead Strategies