All news

November 17, 2020

Third Semester of 2020

Seven months have passed since the World Health Organization (WHO) declared the spread of COVID-19 to be a pandemic. This virus has done a lot of human, social and economic damage.

Following an average contraction of 6.9% of the G20 economies in the second quarter (11.5% in Canada and 9.1% in the United States), the last 3 months of the year continued their momentum to become the most impressive rebound ever recorded. During the summer, manufacturing activity picked up nicely and global trade accelerated.

However, markets were shaken in September following a surge in COVD-19 cases and the news that a second wave was well underway. Other factors have also depressed investor confidence, such as:

• uncertainty over the next US election
• failed negotiations between Republicans and Democrats over the next wave of stimulus for US households and businesses
• the lockdown of certain activity sectors in several countries (including Canada and the United States).

The improved economic backdrop in the third quarter was also felt on the ground. In the United States, 51.5% of workers who were unemployed from March to April found a job at the end of September. In Canada and Quebec, the numbers improved to 76.1% and 86.2%, respectively.

Market performance from January 1, 2020, to September 30, 2020^{Footnote 1}

• S&P 500 (US equity): +5.57%
• S&P/TSX (Canadian equity): -3.09%
• MSCI EAFE (International equity): -6.69%
• Canadian bonds: +8.00%

The technology sector is key to analyzing the performance of US stocks. In fact, the performance of the S&P 500 drops to -2.94% if the tech sector is excluded. (The tech sector accounts for 30% of the S&P500 index.)^{Footnote 2}

Despite the fact that one sector stands out much more than the others, it is important to maintain healthy diversification, which reducesportfolio risk and volatility.

Several central banks have spoken out on the economic impact of the pandemic in order to assess monetary policies. The US Federal Reserve, for example, noted that the US economy has recovered significantly, but a lot depends on consumer confidence. Mr. Powell said the Fed would allow the inflation rate to rise above 2% as the economy recovers and its target interest rate would remain unchanged at 0% to 0.25% for "an extended period.” The Bank of Canada also kept its benchmark interest rate unchanged at 0.25% in the third quarter and said it would maintain its large-scale government bond purchase program designed to foster liquidity in the financial system. In short, monetary policies will remain accommodative for a long time to come, which is a positive sign regarding the recovery of the economy.

Now what about the American elections? Pundits and polls predict a victory for Mr. Biden and the Democrats. On the other hand, Mr. Trump can’t be discounted yet. He will do everything in his power to change this trend in the coming weeks. Each candidate has advantages and disadvantages for certain sectors of the stock market. While volatility will steal the show in the coming weeks, we remain bullish on equities for the longer term. The phenomenal amount of liquidity in the financial sector leads us to believe that equities will benefit in the coming months. In addition, "TINA" (There is no alternative) is back. With very low interest rates for the next several years, bonds and guaranteed investments do not offer significant (or sufficient) income. That said, investors are turning to the stock market to meet their performance targets. We will keep you updated on the impacts of the US election.

Finally, unless there is a significant change in your personal or financial situation, it’s best to stay focused on your goals and your initial asset allocation. A properly diversified and rebalanced (that's the key word) portfolio is designed to achieve your long-term goals. This year is showing us yet again how important it is to stick to our investment strategy.

We are always available to answer your questions and discuss these topics in greater detail.