Back to school and summer re-cap
I hope you and your family are well and have enjoyed the summer. Fall is approaching and the “new normal” continues as students head back to school, whether virtually or in person, and many people continue to work from home.
Globally, the number of COVID-19 cases surpassed 24.4 million in August as reported by Johns Hopkins University. However, infection rates are slowing in many parts of the world. Although some countries have experienced second waves of the virus, many are in recovery mode.
Here is a brief update with some of the past months developments -
Macroeconomic and market developments
In an effort to support the labour market and broader economy, U.S. Federal Reserve (“Fed”) Chairman Jerome Powell announced a major shift to “average” inflation targeting. This means the Fed will allow inflation to trend moderately above the 2% target to offset extended periods of below-target inflation.
The S&P 500 Index, a broad measure of U.S. equity returns, reached an all-time high in August, following the pandemic-induced downturn during February and March. The upward move marks the index’s fastest-ever recovery from a bear market (defined as a steep price decline, typically exceeding 20%).
COVID-19 continued to take its toll on Canada’s real gross domestic product (GDP), which declined 38.7% in the second quarter of 2020 – the largest decline on record. However, preliminary data from Statistics Canada indicated a 3% increase in real GDP for July, suggesting that the economy may have turned a corner.
A partnership between China and Canada to carry out Canada's first clinical trials of a potential COVID-19 vaccine was abandoned amid tensions between the two countries. However, there are a number of other vaccine candidates in development around the world. In August, Canada announced deals to reserve millions of doses of potential vaccines from U.S. pharmaceutical firms Moderna, Pfizer, Johnson & Johnson and Novavax.
How does this affect my investments?
Many global stock markets have recovered a significant portion of their losses from earlier in the year, while the U.S. market has gone on to set new records. It may seem odd for stocks to come back while there is so much economic difficulty and uncertainty. This simply reflects the forward-looking nature of stock markets and the performance of a number of large companies that have done well despite the pandemic.
Will these gains hold or can we expect more volatility?
Short-term market movements are impossible to predict. As I have noted before, market declines have historically been followed by recoveries and new highs – much like we saw during August with the S&P 500 and other markets. In fact, most market gains are achieved shortly after a bear market. By staying invested, with a proper asset allocation, your portfolio will be positioned to benefit from a recovery.
U.S. election thoughts
Making predictions in the U.S. presidential election would be nothing short of heroic, given the 2016 election results.
Under a Biden and Democratic administration, the main domestic policies expectations would be higher taxes on both corporations and wealthy individuals, an increase in infrastructure spending and the adoption of an energy policy strategy to tackle climate change via renewable energy. Importantly, Biden has already distanced himself from the more progressive policies of his party, which is a market positive. Yet financial markets remain worried a Democratic sweep that would lead to higher taxes and negatively impact corporate earnings. I am less worried about a negative market outcome under a Democratic win.
For one thing, post-COVID, taxes on corporations and wealthy individuals are more likely to go up than down, not only in the U.S. but globally; the long term reality is that the direction for taxation seems to be up rather than down given the increased debt burden of the global economy. The market may already have accepted this reality. This might also be offset by other measures that should be growth positive. These include a plan to build better infrastructure, a return to better global cooperation in fighting the pandemic, tackling global climate change, or restoring better global trade practices. Lastly, both parties have adopted a tough stance on China; the difference may be in the tactics employed after the election. We know how “tariff man” would likely continue trade policy. Under a Democrat sweep, the abandonment of a tariff approach could provide a relief to markets.
Finally, we must remain alert to the possibility of increased regulation in certain sectors. Pressure will be strong to find new revenue sources, given the large deficit that any new administration will inherit. There is already noise around Big Tech companies’ approaches to their predatory competitive practices. Concerns around new regulatory action to reduce their influence could interrupt their market dominance and, at a minimum, create a sector rotation away from growth companies and trigger a market correction. That being said, technology is a key strategic U.S. advantage and you wouldn’t anticipate any administration implementing new regulation that would threaten their long-term global leadership.
This election may be like no other. Stay tuned!
If you have any questions or concerns let me know.
Take care,
Matthew Bishop
Investment Funds Advisor
Sources: CI Investments Inc., CIBC, Bloomberg Canada, CNBC.com, Globe and Mail, CBC.
