2020 will go down as one for the history books. The first reports of a mysterious virus quickly turned into a pandemic, global shutdown, and the worst economic crisis since the Great Depression. And yet, by the end of the year, markets had recovered beyond expectations.
In March, all eyes were on the S&P 500, S&P/TSX, Nasdaq, and MSCI EAFE Indices as they fell approximately 34%, 37%, 30%, and 34% respectively. Every economic downturn in history has led to an upturn, and this time was no different – except perhaps the speed at which the drop and rebound occurred. The S&P 500 closed at the end of 2020 with a record high price index of 16.3% year to date, and the S&P/TSX, Nasdaq, and MSCI EAFE year-end price indices were 2.2%, 43.6%, and 5.4% respectively. One explanation is the nature of the shock itself. The Pandemic economic shutdown was an exogenous shock rather than one born from within through inherent economic weakness and seen as something we can recover from faster. Markets and economic indicators were not flashing red prior to the decision to shutter economies.
For investors, the best opportunity occurs when equities fall 30% or more from their peaks, and this proved true again last year in terms of returns from the bottom. While that ideal bottom of the market investment opportunity has passed, we’re still optimistic about the year ahead. There’s reason to believe that the economic environment in Canada, the U.S. and internationally will be much improved from 2020. A few points worth noting:
• Coronavirus. Areas of Canada and the U.S., along with several European nations, are experiencing a second round of lockdown. However, there’s far less uncertainty this time around. We know what to expect and we know it works. There is also light at the end of the tunnel as vaccines are continuing to roll out globally. Downside risk is attributed to how successful (perhaps perception) vaccinations are delivered to people’s arms.
• Canadian dollar. We believe the CAD will continue to rise relative to the U.S. dollar (USD). As oil prices continue to trend higher, we anticipate the loonie trading at US$0.79 or higher (possibly to US$0.83) over the course of the next 6–12 months. Oil is trading up from the low price of $11.26, in 2020, back to longer-term average above $50 per barrel. And if we wish to be entirely accurate, there was a day in 2020 when oil futures traded negatively i.e., you would be paid to take delivery!
• Stimulus worked, mostly. There will be plenty to debate about how it was applied and future costs. That said, it is indisputable that unlike other recessions there was an increase in disposable income. According to Stefane Marion, Chief Economist for National Bank, disposable income rose 12% in 2020. We avoided the feared mass insolvencies and there was a positive wealth factor of 10% for 2020. Did it remedy all economic problems? No, two income families made necessary sacrifices to meet the needs of their children. Those earning less than $800 per week still felt considerable economic strain. While imperfect, it did achieve considerable success in positioning the average Canadian for recovery from the Pandemic shock while shedding light on areas for future improvement. Consider the positive disposable income from 2020 as part of the economic multiplier effect for 2021. Savings will be used for consumer spending or investment.
• Recent economic forecast by Canada’s leading economists were generally consistent in their optimism for 2021 with expected 5% global growth. By comparison, 3%-3.5% growth is generally considered very good. Canada is also positioned well given its energy and commodity base. Expecting 3.7% growth in Canada by year end. Again, the risk is tied to vaccine rollout but as stated by Doug Porter, BMO Chief Economist, “risks delay not derail” growth.
• Inflation. Prices will continue to rise in 2021, however, central banks will likely keep interest rates low until well into 2022.
• Investing Opportunities. The gains earned from the market bottom since March of last year will be hard to replicate. Sectors that flourished in 2020 e.g., e-commerce, are getting expensive. By year-end, the economic recovery broadened to include all market sectors. The trade appears to be rotating from growth to value leading to assets that were crushed and lagged in recovery to show strong signs of life. The Biden election and subsequent winning of the Senate all but guarantees a bias towards green energy in the US. There will likely be a lot more interest in environmental themed stocks and conventional infrastructure. This in turn will increase demand for materials and energy, Canada’s wheelhouse.
As always, keep an eye on your short-, medium- and long-term needs. Do not get caught up in the euphoria of short-term gains (this can be hard to resist). Those fortunes can go either way quickly. Most clients benefit from a bar bell approach with a selection of short-term investments, somewhat impervious to market vulnerabilities and higher risk investment for longer term wealth accumulation. Speak to us about where your portfolio fits.
~ Cam, Rajeev & Paco