From minus temperatures two weeks ago to a mid-30s humidex today summer has hit Toronto in the usual way, with little to no spring time. Equally hot is the stock market as on the 124th anniversary of the Dow Jones Industrial Average, the S&P 500 opened above 3,000 for the first time since March 5th, marking a 37% recovery (intra-day, 32.1% based on closing price) of the 35% decline that began on February 24th, call it three months ago. With the benefit of hindsight, the catalysts for this powerful advance are obvious. Continuing steady progress has been made at shrinking the growth rate of COVID-19 case counts in markets spanning from Germany to the U.S. (see graph on below left) and here at home in Canada. Meanwhile, large 2nd world markets such as India and Brazil (see graph on below right) seem to be two months behind North America as case counts are just in the midst of spiking. To maintain the positive momentum we’re seeing in North America, one item needs to be addressed plus members of society must adhere to one rule. First, authorities must further ramp up the capacity to test people. Second, despite summer being here, citizens must fight the urge to break free from social distancing. It goes without saying that setbacks would not be welcome by risk assets, especially given that the already humungous level of fiscal accommodation and monetary stimulus that has been utilized leaves question as to how much more could be done in the event of a major set-back.
As I write this week’s “Market Thoughts” on another rainy (Friday) morning the S&P 500 has just bounced off the low end of its latest 2800-2950 range while the US dollar, gold and oil continue to grind higher. This note will assess the liquidity in financial markets, the action in equities and table a few medium term topics to ponder over the long weekend.
From famine to feast is the simplest way to describe the stock market of April 2020. North American equity indices punched out double digit advances in response to unprecedented monetary stimulus and fiscal accommodation combined with an apparent comfort that the viral contagion was going to be contained in a timely fashion. Clearly looking beyond the plunge in the economy and corporate profits, the graph on the below left shows that as of late April, the S&P 500 had enjoyed its sharpest recovery off a bear market bottom in fifty years. This rally occurred after stocks had lost 42% of the return generated during the recent bull market as highlighted by the far right hand bar in the bar chart on the below right.
It’s hard to believe that it’s been six weeks since the team at Forge First has seen each other. Yet our operations and investment processes have remained fully intact and running smoothly. Do we really need that office space? Do urban families really need a 2nd car? Of course I’m just joking when it comes to these questions, and while I am looking forward to that glass of wine at a bar with friends or watching the Leafs or Raptors live, there’s little question that some habits will change and other trends will be reinforced, both of which having ramifications for equities.