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Market Brief - July 3, 2020

Erica Stephenson - Jul 04, 2020
Equities were higher in June, with the S&P/TSX index having its best quarter since Q2 2009. Since 1983, the TSX has had just 4 quarters where returns were 15% or greater. In each of the subsequent quarters the Canadian market was always higher.
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Second Quarter – June 2020 Review

Equities were higher in June, with the S&P/TSX index having its best quarter since Q2 2009. Since 1983, the TSX has had just 4 quarters where returns were 15% or greater. In each of the subsequent quarters the Canadian market was always higher^.  In the US, the S&P 500 logged a modest rise after more solid gains in May and June. Stocks rallied earlier in June on continued optimism about an abating COVID-19 pandemic and the momentum from a reopening economy, only to falter as growing coronavirus hotspots (largely in the US South and West) threatened to derail the progress.

Of note this month, Gold was stronger rising 2.8% for the month and closing above $1,800/oz for the first time since 2011. Oil was better as well taking support from hopes of increased global demand and lower outputs due in part to the OPEC+ production agreement. WTI (West Texas Intermediate) climbed up 10.7%. The Tech sector led the equities market with a boost from both Apple and Microsoft, but not to be overshadowed by consumer discretionary giant, Amazon. The airlines looked to start their recovery with early month gains which were gradually whittled away. The banks were slow moving and the health care providers wait for news on a treatment or vaccine.

In some ways June was a tale of two months, with the market at first continuing its strong April through May rebound on positive coronavirus trends. Subsequent and progressive lifting of local lock downs, positive demand commentary from corporate earnings calls, signs of improvement in the economic data (4.8MM jobs returned in US) and some expectation of continued fiscal support.

Then the tone began to shift thanks to a sharp reversal - signs of growing coronavirus hotspots around the US (Florida, Texas, Arizona, and California), which had been spared some of the worst of the early waves of the epidemic, now began seeing an increase (and in some cases record-setting) in rates of new-case growth and hospitalizations. As well, news of flare-ups around the world including a breakout in Beijing (which has since been reported contained), began to weigh on markets. The volatility in the second half of the month appears to be a natural place for a consolidation phase before a next leg higher. The summer months are typically lower volume months, which further enforces a period of consolidation.

While this was happening, there was talk of another round of stimulus funding in the US owning to the large gap between the $3.5 trillion Bill the US House Democrats passed instead of the actual amount issued coming in closer to $2 trillion. Canadians didn’t have to wait for Parliamentary approval as CERB benefits were automatically extended to the end of August which leaves the Government looking for ways to get Canadians motivated to return to work.

US-China relations also remained a key variable during the month, creating volatility when news creeps up. There was a lot of attention on the status of the "Phase One" trade agreement, where Chinese pledged purchases have been under pressure from the pandemic. Not to mention rising tensions with the US in other major areas (including the early spread of the virus, the crackdown in Hong Kong, and US denunciations about human rights violations in Xinjiang). We are monitoring this situation for any escalations.

And finally, Presidential politics crept back into the narrative this month considering we are a mere 5 months away from the US Election. While the wave of protests following the death of George Floyd did not have much direct impact on the market's price action, the disruptions did serve to highlight the different approaches of Trump and Joe Biden, the presumptive Democratic nominee. Biden has led in many head-to-head national polls for some time, though he saw his margin widen during the month of June. More significantly, several state-level polls have shown Trump is currently trailing among likely voters in several battleground states which he carried in 2016.

We are starting to analyze and discuss the possible market impacts that could result from a Biden administration; items such as a rollback of the 2017 tax cuts or greater regulatory oversight, an increase in environmental restrictions and potentially more disruptions to the Keystone pipeline. But we are only at the beginning of this election story (with the progress of the coronavirus pandemic a key variable), and politics can change quickly.

We will use our best judgement and rely on risk management practice where we can. We are will continue to use patience and understand that the capital markets will inevitably surprise us along the way but remember the portfolio guidelines we’ve put in place.