June 02, 2020 – KERR MARKET SUMMARY
Investment portfolios continued to rebound through the month of May. Markets were increasingly encouraged by reopening prospects, progress on COVID-19 therapeutics and vaccine trials, and indications that central banks would remain accommodative for the foreseeable future. Many investors sense that global economic activity has passed the nadir and is on the road to recovery. Yet the million-dollar question persists – will markets retest March bottoms?
In economic news, many participants appeared to look past April’s dismal data and focus on reopening prospects instead. The rise in May’s Flash PMIs suggests that the global economy may have passed the low point for this downturn. The relative resilience of consumer confidence despite surging unemployment levels is a testament to fiscal rescue efforts, and suggests that the recovery should pick up speed as fear of the virus diminishes. With lockdowns gradually beginning to ease, many commentators expect June economic data to reflect a reacceleration. Nevertheless, labour market scarring and weak demand could temper the pace of the rebound. We expect individuals and businesses to tread carefully as lockdown measures slowly lift in the second half of 2020. We emphasize the word slowly as we believe the reopening process and subsequent recovery will be choppier and more gradual than many anticipate. We simply do not know how successful the reopening stages will be, nor what the right pace is to balance economic recovery without tipping regions back into lockdown.
As investor optimism persisted throughout May, bond market performance remained relatively muted. The Canadian bond universe returned 0.3% last month, however year-to-date its 5.7% rate of return remains considerably ahead of various stock market benchmarks. Corporate bonds outperformed their government counterparts last month, a typical pattern of a risk-on environment. Numerous central banks have emphasized their continuous commitment to counteract COVID-19 via a range of monetary tools. The U.S. Federal Reserve has reiterated that its toolbox will specifically exclude negative interest rates.
Equity markets continued their ascent in May, bolstered by advances on vaccine and therapeutic trials, reiteration that central banks would remain in “whatever it takes” mode, as well as preliminary economic data pointing to the beginning of a recovery. Canadian, U.S. and international stock markets rose 3.0%, 4.3% and 3.9%, respectively. We agree that risk assets may be starting to climb back, however we caution that the stock market could be getting ahead of itself. Equities have climbed over 30% since March 23rd lows, a figure that appears disconnected from economic reality. Of course, conventional wisdom would explain that stock markets are forward looking, with investors having already accounted for a cataclysmic drop in Q2 activity and projecting a relatively rapid recovery. Although sentiment has improved, we believe the outlook for stocks and other risk assets remains fragile, with upside and downside risks appearing balanced in the near-term.
Now, back to the million-dollar question. Have we witnessed the bottom? We believe investors are pricing in an overly optimistic near-term view and expect volatility to remain elevated as economies reopen. We still anticipate the global economy to rebound in the second half of 2020, however we expect it to be a bumpy ride, with demand recovering gradually, corporate earnings remaining under pressure, and markets likely due for additional periods of consolidation. Nevertheless, the reality is that nobody knows how the markets will behave for sure. This is true not just today, but always. That is why we continue to emphasize defensiveness in our portfolios, as well as maintain sufficient liquidity levels to cover our clients’ needs, particularly those with shorter time horizons. Meanwhile, our experienced platform of investment managers continues to scrutinize underlying investments for potential concerns, as well as closely monitor how companies are navigating this challenging environment. Over the long-term, we continue to favour prospects for equities over fixed income and cash. We think the path to full recovery will be lengthy, and that some sectors and/or stocks may not return to where they once were. However, we are confident that over time the market will continue to reward resilient long-term behaviour.
Sources: Capital Economics, Morningstar Direct, National Bank Financial Markets, Globe Investor