Believe it or not, summer is almost over and there is only 1 month left before Canadian children all go back to school full time. In the US, the majority of the schools are also expected to open full time in September. While COVID-19 lingers into 2021, unless something catastrophic happens, you can expect children back in school and some parents who are able to return to work to do so as well. Given 19 million+ cases and 6 million+ currently infected, it was a tough call, but one the governments have made to try and reopen economies.
Let’s take a look at the current state of the economy and stock market. Unemployment in North America while improving is still beyond normal recession levels and travel, recreation, and spending activities have been brought to halt, which should indicate recessionary type stock returns. So, why are stock markets still close to record levels? For that, we can turn to the largest reason: FREE MONEY. The largest nations in the world have amassed an estimated $15 trillion USD of stimulus in the form of unemployment pay, asset purchases, loan guarantees, etc. Which is an extremely large number considering the total global GDP for 2019 was about $90 trillion USD. So while 10-15% of the workforce is now “unemployed” they pumped in a very large chunk back into the economy. In the US, they are working on another stimulus bill that is expected to be $1 trillion+ to provide more support for the unemployed while the US unemployed numbers improve. Unemployment in the US and Canada are sitting at about 11.1% and 12.3%, slowly ticking down from their highs of about 14.7% and 13.7% respectively. Around the world, unemployment is improving also with China around 5.7% (about 5% pre-COVID) and the EU at 7.8% (about 7% pre-COVID). In order to keep this market ride going, we will need to see these numbers improve before the stimulus runs out. This will result in either perfect timing or another nail biter drama show for the remainder of 2020.
Right now there are some consistent themes in the market.
Firstly, governments will do whatever it takes to keep the economy afloat. This means printing of money, low rates, and asset purchases. This has created a large amount of government debt in order to fund all this and in turn has devalued currencies around the world. While this helps the stock market and yes we will one day have to repay this, there are some other side effects. This has led to a higher artificial valuation of real assets, which means commodities and tangible products now cost more than before. Hence, the run in gold, copper, and silver all of which have increased in value. To amplify this effect, as a result of this pandemic there has been an increased cost to obtain our consumables. Beef, lumber, coffee, and sugar are all at record prices, we are sure you have seen this increase at grocery stores when you pay $15 for a steak now that used to be half the price. This is a trend that is very difficult to curtail without raising rates, so given our current global pandemic situation, we would not expect this trend to stop soon.
Secondly, the rich are getting richer and the poor are getting poorer. This is true on multiple levels. On the lowest level, the majority of individuals that lost their jobs were low-income earners and those jobs are not returning quickly. While demand for high paying, higher educated required positions are increasing. The greatest benefactors of this new world dynamics have been the mega-cap technology stocks. Amazon, Apple, Google, Microsoft, Facebook, etc. all have reported record earnings as we sit at home and use their services more and more. On the flip side, many small businesses cannot compete and are struggling due to limited capacity, relying on foot traffic, etc. all terms that are crippling for sales. This is a tough reality, but a definite symptom of this pandemic, the great divide between rich and poor has only been accelerated by this.
Lastly, daily life will change going forward. Working from home will now be a consistent theme, in-person social interaction will be less, people will drive less, higher education will be even more required, etc. We would not expect things to reset to the ways of yesteryear, and people will need to adjust accordingly.
We believe these themes should be consistent going forward but now let’s focus on the general health of the stock market and potential events upcoming for the second half of the year.
US Government Stimulus Bill. We are slightly into August and the previous bill expired on July 31st, 2020. While the new one hasn’t aligned with the expiry of this bill, the market has not yet begun to sell off as the majority of investors out there believe this will get passed in due time and should give the market a little comfort knowing unemployment can remain high for a little longer.
Vaccine and Treatment Progress. This is a continual process but more and more pharmaceutical companies are showcasing very promising initial results from their trails. On top of this, drug companies are already mass producing these in hopes they will be successful. Upon completion, they will be ready for the masses quite quickly and the fight against COVID-19 will commence. If successful, reopening the economy will be far more rapid and cases will slowly begin to drop.
Cases Decrease on their Own. This is a bit of a long shot and given certain regions past it doesn’t seem likely, but if we can stop the spread of the disease, we can reopen the economy and go back to normal.
US Election. This is considered a negative because of the uncertainty. Once campaigning begins no one is sure what areas will be under attack, what areas will be propped up, and what policies will be implemented. The uncertainty simply is not an investor’s ideal environment.
US/China Trade War. Besides the Tik Tok fiasco, this has been all too quiet. There is a lot of bad blood out there and that simply does not go away on its own. Both the Democrats and the Republicans have issues with China and no matter who gets elected you can bet this fire will be reignited.
Second Wave. The dreaded second wave we have all been hearing about could be around the corner. Since the beginning of this people would tell stories of the second wave when summer was over and the children went back to school. Well here we are about one month out and since the virus hasn’t weakened, with an increase in activity we could see this happen.
Unemployment. While improving, there isn’t much indication that we are getting back down to the low levels in February of this year. Even with the eradication of the disease jobs will not come back overnight, it really will be dependent on how this job loss will hurt the economy over time.
Overvaluation. Valuations of stocks are at high levels, we wouldn’t say dot com type levels but they are high for the amount of revenue they are currently generating. Many stock prices continue to rise without real fundamental improvement, this cannot continue forever, and either the fundamentals will need to improve or the prices will need to flatten or come down.
We have highlighted more negative events than positive events that could be coming up in the short term, which on the surface would make for a dreary future but while events and turbulence will happen what is important is the constant themes that exist in the market highlighted prior to the events.
So, what does this mean in terms of investment? Well, we are glad you asked. Technology should continue to lead us going forward, it is the new consumer staple. Can you imagine life without Google, Facebook, Amazon, and Apple? Probably not, they are a staple in most people’s lives and will be the Johnson and Johnson, Coca-Cola, Walmart’s of the 80s and 90s. These investments grew thousands of percentage points over that time period, as people simply just could not live without them. Real assets will continue to climb in value, precious metals, real estate, commodities should all see a rise in prices. Unless global governments stop stimulating the economy, dollars paid for a real asset will go up. We are promoters of alternative private investments and they will continue to be a staple in our portfolios to avoid the overvaluation of the public markets. Lastly, more than ever, knowing what you invest in and understanding the companies is vital in today’s world as things can change in an instant, with proper monitoring of investments you can mitigate those negative risks and minimize the decrease in the market.
Konrad, Justin, and Merriel
More articles and information is available at www.lkwealth.ca
Source: BCA Research, Bloomberg, Reuters, Yahoo Finance, Trading Economics
Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.
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