Market Brief - June 5, 2020

Erica Szczech - Jun 06, 2020
We're looking at one hundred days since equity markets hit all-time highs and then did an about-face and ran into bear market territory. As stocks continue to move higher and higher, many of us are wondering where is all this fuel coming from?
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It’s hard to believe looking at the calendar that it’s been one hundred days since equity markets hit all-time highs and then did an about-face and ran into bear market territory. As stocks continue to move higher and higher, many of us are wondering where is all this fuel coming from? We’ve seen economies re-open around the world, but is this rally sustainable?

In the past two weeks, markets have continued to broaden gains into the laggards, like financials, real estate and small cap stocks vs the larger index weights. An interesting chart sent to us from Canoe Financial, shows the percentage of stocks above their 50 day moving averages finally breached 90%, a key thrust level. This has happened 19 times in last 52 years, and every time the markets were higher 12 months later - we like those statistics!

Of course, there is no way of knowing what will happen with the market in the short term – it seems to reflect a quick recovery, given today’s news about May US employment numbers, posting a gain rather than a loss. But most of our conversations recently revolve around the stock market recovery and not the economic recovery. The economy most likely hit its low point in Q1, and unless there is a second wave which forces businesses to shut down again, the recovery is likely to become more visible as we get past the initial re-opening stages.

Banks stocks kicked off Q2 earnings season last week and due to the pandemic, they led the downside of the TSX, but have not been as quick to rally. The decline in banks was mainly attributable to credit and reserve builds – or the necessity to have cash reserves available on existing loans and the unemployment uncertainty caused by the shutdown. The first to report was National Bank, followed Royal and CIBC – all Big-6 banks are now outperforming the TSX due to quick Government stimulus for workers and the reopening of the economy.

Another reason this rally will continue is ‘cash’ as a percentage of equity market cap remains high despite markets moving higher – meaning at some point those investors who took money out of the markets will put it back to work. To highlight this, after today’s unemployment numbers, markets took off in North America after an unexpected gain of 2.5M jobs in the US and 290,000 people going back to work in Canada. These improvements arrived 1-2 months ahead of expectations and caused the TSX to trade 2.10% higher, the S&P500 2.62% higher and the DOW up over 3% in a single day.

Recently, after the death of George Floyd, we’ve seen both peaceful and violent protests in the US and around the world regarding racism and equality; but as we’ve seen from other current events, markets have been unfazed.

This prompted us to find out if in fact civil and political unrest has ever been a factor for the markets; Tony Dwyer, our US Strategist, put together this chart of the S&P500 index in 1968 which has some striking similarities. Some may remember 1968 as a difficult year with the war in Vietnam, Martin Luther King and Robert F. Kennedy assassinations, Hong Kong flu and a surprising NASA Apollo 7 launch. The index fell 9% from January to March but rallied 24% off the bottom and finished the year with a total return of 10%.

Compared to 2020, we have experienced a US Presidential impeachment trial, global COVID flu pandemic, a global Oil supply and demand crisis, civil and political unrest around the world, extreme unemployment and the launch of a new spaceship all in the first half of the year. If history is any guide, looks like full steam ahead!