Last quarter of 2020

Last year will definitely go down as one of the most trying in history, both for the economy and for people personally. True to the year just ended, the last quarter of 2020 saw its share of volatility and surprising news.

First off, we need to mention the arrival of a vaccine against COVID-19 in many Western countries. Although there’s still a long way to go to beat the pandemic, this is good news both in human and financial terms.

Canada

The Canadian equity index (S&P/TSX) ended 2020 with a performance of +5.60%. The arrival of the vaccine in Canada pushed the index up by +8.97% in Q4 alone.

Interestingly, as at November 1, the tech company Shopify Inc. and gold companies accounted for more than 60% of the Canadian stock market return (see Graph 1). The performance of the index therefore does not reflect a Canadian investor’s typical return.

At the beginning of the year, Canada had one of the worst household debt ratios among G20 countries. While a recession usually leads to a drop in household income, the opposite happened in 2020. Most Canadian households saw their incomes increase (economic assistance plan) and their expenses decrease (lockdown).

We can thank the Liberal government for all the programs it made available, such as the CERB. Admittedly, the country is now faced with massive debt, with a debt-to-GDP ratio close to 50% or $400 billion (see Graph 2). This isn’t a concern for us for the time being. To support economic recovery, it’s best for governments to maintain an accommodating approach.

United States

The US equity index (S&P500) ended the year with a performance of +18.39% (US$). This may seem impressive, but further analysis reveals that only 6 companies contributed 75% of the index’s return (see graphs 3 and 4). As with Canadian equities, the performance of the index does not reflect a well-diversified portfolio. To mitigate risk and volatility in portfolios, it’s essential to maintain healthy diversification across all sectors.

Politically, the country is divided more than ever between Trump supporters and other citizens. Will the Biden administration be able to ease these tensions? Only time will tell. That said, the Democrats have just won Georgia’s 2 vacant seats in the Senate. The Democrats now control the presidency, the House of Representatives AND the Senate. Mr. Biden will therefore have a free hand to govern for the next 2 years. Such an administration has its pros and cons:

Pros:

A stronger-than-expected stimulus plan and better management of the pandemic
Fiscal policies that will tend to remain accommodating and supportive of sectors that underperformed in 2020
Promotion of the renewable energy sector

Cons:

Possible tax increase for wealthier businesses and households
Increased restrictions on large corporations (such as Apple, Facebook, Amazon, etc.)

Lastly, with such measures to come, it would not be surprising to see the US dollar weaken against other currencies.

Europe

The European equity index MSCI EAFE (including Japan) ended the year with a performance of +6.63%.

Some European countries were harder hit by the first wave of the pandemic, and some measures (including lockdown) were more severe than in other parts of the world. Furthermore, a trade and cooperation agreement (post-Brexit) was signed between the European Union and the United Kingdom. Time will tell what the financial and economic impact of this agreement will be, but the news was well received by investors.

The year 2020 will certainly be forever etched in our memories. Nevertheless, we can learn certain lessons from it in terms of investment:

Having a plan and sticking to it is the way to success.
Stock markets are very (even extremely) unpredictable. It’s therefore important to maintain our asset allocation at all times and stop guessing at market ups and downs.
A diversified portfolio reduces risk in turbulent times.
The stock market and the economy do not always evolve in tandem.
- The economy evolves based on present-time data, while stock markets anticipate future results.

Final Thoughts

Basically, if we’d known ahead of time everything that the pandemic would entail, we may not necessarily have made the right investment decisions. If you’d been told that the worst public health crisis in modern history was about to strike, would you have wanted to invest? If you’d been told that we’d sink into a recession of unprecedented magnitude at an unprecedented speed, would you have believed that it was a great time to invest? If you’d been told that governments were going to run previously unimaginable deficits to fight this invisible enemy, would you have thought the conditions were ripe for taking risks? This proves that staying on track with our investments and asset allocation is the best strategy for getting through tough times.**

Please feel free to contact us if you have any questions.

**Text from the quarterly document written by Michel Doucet and his team.

Each Desjardins Securities advisor named on the front page of this document, or at the beginning of any subsection hereof, hereby certifies that the recommendations and opinions expressed herein accurately reflect such advisor’s personal views about the company and securities that are the subject of this publication and all other companies and securities mentioned in this publication that are covered by such advisor. Desjardins Securities may have previously published other opinions, including ones contrary to those expressed herein. Such opinions reflect the different points of view, assumptions and analysis methods of the advisors who authored them. Before making an investment decision on the basis of any recommendation made in this document, the recipient should consider whether such recommendation is appropriate, given the recipient’s particular investment needs, objectives and financial circumstances.