Just Over a Year Ago...
Just over 1 year ago the pandemic was quickly changing from something that was happening elsewhere to other people, to something that was happening to all of us everywhere. It went from an abstract thing on the other side of the world to something very real in our community. The World Health Organization had just officially labelled the COVID-19 a pandemic and the stock market triggered circuit breakers on what was labelled Black Thursday, March 12, 2020. The worst single-day percentage fall since 1987. We were inundated with new records in every competition we wanted no part of; the highest number of hospitalizations, the biggest jobless claims, the fastest declines into a bear market, the list went on... The firehose of information was on full blast and it was exhausting to take it all in. A few days later, at what was in hindsight the point of maximum uncertainty, central bankers stepped in around the world to prop up the global economic machine. Stuff that had never happened before was happening all the time.
There is a long list of things that we took for granted before the lockdowns. Most of us can think of things that we can’t wait to get back to; travel, sporting events, large gatherings with friends and loved ones. The feeling of certainty is what was probably missed the most. Being able to go to sleep knowing what to expect out of the next day. Going to the grocery store without being surprised by a lineup and empty shelves. Knowing whether or not the kids would be back in school anytime soon.
A lot has changed since this time last year. There’s a new president in the US, millions of retail investors are pushing obscure stocks around, commodities and value stocks are doing well, long term interest rates are increasing and hurting conservative investors. But the biggest change since the fall has been the feeling that we’re going to be OK. Knowing that a vaccine will be administered to enough of the populace that this pandemic will become a thing of the past, and that we will be safe to live amongst the crowds mask-free.
It feels like uncertainty is receding, but if there’s one thing that we learned over the past year, it’s that certainty is an illusion and we shouldn’t take what we have for granted.
THE ECONOMY
There is concern that inflation could be too high as economies reopen. The fact is inflation has been relatively low the last number of years and may move higher but will likely remain at low levels relative to history.
The outlook for growth has been positive but the risks remain on whether vaccines and their efficacy against new variants will interrupt the recovery.
Governments have been swift and consistent to support significant stimulus to the economy.
THE EQUITY MARKET (STOCKS)
New highs have been achieved on the markets as vaccinations progress, and earnings have exceeded expectations.
Opinions abound that areas of the market are over-valued but as fears of the crisis fade higher levels could be reached.
The recovery has sparked a rotation out of traditional large cap stocks to more sensitive areas in small and mid-caps stocks, financials and industrials, and value stocks.
Stocks over bonds has diminished in the last month as a result of rising yields, but equities continue to offer attractive risk versus bonds. Consequently lower risk investors need to consider higher stock or strategic fixed income options.
THE FIXED INCOME MARKET (BONDS)
Long term bond yields surged last month as faster inflation expectations and better economic growth offset the impact of central bank efforts to hold rates down.
Part of the increase is due to real, or after-inflation, interest rates rising from unsustainably low levels. Real rates could rise even higher but increases are limited by structural changes in the economy.
The recent surge in global yields has damped the valuation risk that existed in the bond market so bond prices could find near term support at current levels.
I hope this update is helpful. If you should have any questions or concerns do not hesitate to let me know.
Best regards,
Matthew Bishop
Financial Advisor
Source: National Bank – Index returns are for information purposes only and do not represent actual strategy or fund performance and do not reflect the impact of management fees, transaction costs or expenses and investors cannot invest directly in any index.