COVID-19 Market Update: Behavioural Changes Impacting Housing, Retail and Employment
Major indices last week were mixed with the TSX losing 90 basis points, the S&P 500 losing 30 basis points, MSCI EAFE gaining 1.2%, and the S&P Mid-Cap 400 gaining just under 1%. The market rotation that began the week prior continued with value and mid-cap stocks gaining ground previously lost to growth. Meanwhile the tech-oriented Nasdaq lost ground due, in part, to declines in Apple and many chipmakers.
On Tuesday, July 21, positive economic news from the EU helped push European investor sentiment higher in the morning. The economic package being debated the last several weeks concluded with EUR 390 million in grants for the hardest hit of the 27 countries and EUR 360 billion in low-interest loans. By the afternoon, on this side of the ocean, spirits were dampened when it was reported that Mitch McConnell did not expect to meet the two-week timeline requested by the White House. Also, many of the Republican members of the Senate were debating the extension of the additional unemployment payments of $600 per week due to expire at the end of July. Many members of Congress were in favor of the extension; however, at a reduced rate of an additional $100 per week from the $600 in an attempt to reduce the incentive to stay at home instead of returning to the workforce. When re-opening, many small businesses reported employees’ reluctance to return to a lesser paying job than was available from unemployment. Many critics argue that the reduction will negatively impact consumer spending, further slowing the economic recovery.
COVID cases on the climb in several states slowed re-opening and, in some cases, forced reversal as reported last week. The impact of the reversals and closings became evident in the filings for unemployment benefits, which rose from the previous week for the first time since March. Initial claims jumped to 1.41 million from 1.31 million. Statistics Canada reported Canadian retail sales falling 18% between February and May, while online sales jumped 99.3% over the same period.
Our thinking in previous market comments suggested behavioural changes resulting from COVID would re-shape how we conduct ourselves in business as well as socially. A trend noticed pre-COVID was migration from high tax states to lower-tax states such as Texas and Florida and states with less population density. With COVID, another housing trend is gaining attention as reported this week with sales of existing housing rising by 20.7% in June and new house sales rising by 13.8%. Millennials are leaving the cities for the safety of the suburbs and less populated areas where they can be outdoors with some space. Raising families in what is considered a dangerous health environment is creating the exodus from downtown cores. The same applies to the work environment where COVID has enabled work from home to become more accepted by employers. Until there is a vaccine, protocols for elevators, subways, trains, bathroom facilities and restaurants will strain the desire to live and work “downtown.”
Additionally, in some US cities, the perceived need for local government officials to comply with certain elements of society by reducing policing and, in some cases, prosecution of crimes will likely be a signal for businesses and families to relocate. Protection of property is limited and, in some cases, non-existent. This weekend in the US, there are several scheduled protests across the country. If recent demonstrations are any indication, property damage will result as the police are forced to stand-down. This can only accelerate the hollowing out of cities, further damaging cities’ financial conditions under budgetary stress from COVID.
This coming week, almost 40% of S&P companies and 25% of Canadian companies are reporting Q2 earnings. While many companies reporting Q2 last week beat much-reduced expectations, hits and misses are likely to produce volatility in equity markets over the coming days. On Wednesday, the US Federal Reserve will announce its latest interest rate decision, and on Thursday, preliminary Q2 GDP will be reported.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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