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July 29, 2020

Historic Rebound in Q2 2020

The second quarter of the year surprised many with a record performance on the stock markets. With a return of + 20.5% for American equities (S& P500), + 16.9% for Canadian equities (S&P/TSX) and + 20.5% for international equities (Euro Stoxx), it’s not surprising to see the performance of the three recent months enter the record books.

Over this period, the US dollar depreciated against the Canadian dollar, reducing the exchange rate by about -4.6%. This negatively impacted returns in Canadian dollars.

What spurred this meteoric revival of the markets?

• Easing measures and the injection of capital into the economy by many governments.
• Investors have responded positively to the involvement of governments and central banks to support economies and help households get through this crisis. Trump is pushing for a second wave of economic stimulus for Americans.
• The chairman of the United States Federal Reserve (FED) has said he will keep the key interest rate as low as it takes to revive the economy.
• Interestingly, during the 2008 financial crisis, it took the FED six years to roll out major stimulus measures, while it took only seven weeks in 2020.

• A gradual ending of lockdown in many countries.
• Canada has progressively ended the lockdown in most sectors. While many restrictions are still in place (restaurants, shops, travel, etc.), it is encouraging to see the economy pick up. Ontario will enter phase 3 on Friday.
• The COVID-19 virus appears to be under control in Canada. According to public health, it would be very surprising to see another total lockdown as we experienced last March. The people involved know more about this virus and prefer to keep part of the economy open and deal with outbreaks independently.

• “TINA” (There Is No Alternative)
• The rate offered by a Canadian 5-year bond is 0.35% while a 12-month term savings (GIC) offers us only 0.88%. The stock market is therefore, by default, the place with the highest return potential. As of July 1st, the S&P/TSX offered a dividend of 3.6%.
• The term “TINA” means that there is no alternative to the stock market right now, which increases demand for stocks.

What to expect by year-end?

• The OECD (the organization for economic cooperation and development) has published two economic forecasts.
• If the pandemic is brought under control, the world economy would contract by -6% in 2020 to rebound by +5.2% in 2021.
• If the pandemic were to worsen (2nd wave in several countries and a return to lockdown measures, for example), the world economy could fall by -7.6% this year, to rebound by +2.8% in 2021.
• According to the Desjardins Group, the major world economies could see a -12% drop in their GDP for this second quarter. On the other hand, our analysts believe that the worst is behind us. The improvement in certain economic indicators points to a sustained recovery over the second half of the year.
• It would be astonishing to see a return to total lockdown like we experienced in March. Public authorities will prefer to let the economy accelerate in the long term, even if it means managing inflation once the risk presents itself;
• Governments and central banks will maintain a strong presence to support the economy.

That being said, it is more important than ever not to deviate from our strategy, which was designed to manage both the ups and downs of the markets. Stock markets will remain volatile in the coming months and we believe that maintaining our target asset allocation and regular rebalancing is the key to reducing risk in the portfolios. The exceptional performances that took place last April and May (despite total lockdown measures) showed us how unpredictable the stock markets can be in the short term, and how difficult it is to anticipate their direction. Making large asset allocation changes during these periods can be costly for long-term returns.