In my books, the 4 most notable events since I last published ‘Market Thoughts’ on May 26th have been 1) the relentless and almost desperate messaging by various Fed officials that interest rates won’t go up for a very long time, 2) the possibility that the EU may agree to issue common area bonds, 3) unsettling signs that COVID-19 is not yet ready to fade away, and 4) the rise in the polls of the Democrats for this November’s U.S. election. In today’s ‘Thoughts’ I’ll review these four points, discuss graphs that highlight recent market performance, and table a couple of thoughts about what lies ahead including what investors predict forward returns will be for stocks.
The unhelpful but apropos cliché ‘time heals all wounds’ speaks to the performance of equity markets during May 2020 as the S&P 500 furthered its strong performance in April with an additional 4.76% total return during May 2020. Regardless as to why it has happened, for now there’s little question stocks have moved past the trauma of the COVID-19 crisis. Here at home the total return for the TSX was a solid 3.04%, leaving Canada’s main index down -9.70% on a year to date basis.
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.