August 13, 2020

Quarterly bulletin - Summer 2020

A historic plunge followed by a historic recovery

The second quarter of 2020, which ended on June 30, was marked by a historic market recovery. With lockdown measures easing and hopes for a vaccine on the horizon, people are quickly forgetting the historic free fall recorded in the first quarter.

Even though markets are expected to make an almost complete recovery as early as 2021, the risks associated with COVID-19 remain very real. Moreover, the approaching US election shouldn’t be taken lightly. Donald Trump may have fallen behind in the polls, but we shouldn’t assume he has already lost. Even if he does, he’s not likely to give up the office easily. Protectionism is sure to follow, particularly where China is concerned.

United States

In June, the bellwether US index, the S&P 500, continued recovering, albeit at a slower pace. It’s now just 7.77% down from its February 19 peak. However, the road to recovery looks to be longer and harder than expected, with the possibility of new lockdown measures threatening to wreak further havoc on the economy. The US Federal Reserve will have to do more to stimulate the economy, but at what cost? Will aid programs and extended stimulus measures be enough?

Canada

Canada’s TSX Index continued its upward march with a 16.97% quarterly gain. It nonetheless remains 7.47% below where it was at the beginning of the year.

The economy is breathing easier now that lockdown measures have eased, but some sectors are still hurting and scores of businesses are unlikely to survive. The government and the Bank of Canada will have to provide additional aid to individuals and businesses across the country.

International

COVID-19 case numbers are on the rise in several countries, leaving many people wondering if a second wave is on its way. Meanwhile, the European Union has announced a €750 billion stimulus package to kick-start the economy.

A particularly arid earnings season

Second quarter earnings are expected to be down 44%, resulting in a 25% annual decline overall. However, earnings dispersion is far from even. Large caps should be reporting higher profits than small caps, and more robust earnings are expected in new economic sectors (e.g., technology and internet) than in other sectors (e.g., financial and industrial).

Astonishingly, the markets are recovering while corporate profits are down and show little promise for the coming quarters. While the worst economic indicators may be behind us, earnings are likely to hit bottom in the second quarter. That means we won’t know the extent of the damage before corporate earnings are released in early September. Volatility is sure to ensue!

However, investors don’t seem to have their eyes on 2020 earnings. Instead, they appear to be looking ahead to 2021. The US index is currently trading at nearly 19.9 times earnings, which is substantially higher than the ratios seen in recent years. Do the markets expect a vaccine to be discovered before the end of the year? Almost certainly, but things aren’t likely to go back to normal for quite a while yet. For now, we’ll proceed with caution.