Stocks finished the week higher on the re-opening of economies, news of falling COVID-19 infections and death rates, and progress on vaccine trials. The TSX closed the week up 1.9%, the S&P gained 3.2%, while EAFE advanced 3.9% on the week. Small- and mid-caps joined the party along with value stocks outpacing higher valuation growth stocks. Value stocks are still lagging growth stocks year to date as measured by the Russell 1000 Value (-20.20 YTD) and 1000 Growth (+2.53%) indices. Travel-related stocks advanced on vaccine news as did healthcare stocks.
Early-week optimism gave way to geopolitical tensions later in the week as the US Senate introduced a bill that could force Chinese companies to comply with GAAP accounting rules as a requirement for listing on US stock exchanges. If passed, failure to comply within three years could result in the delisting of Chinese companies. Additionally, pro-democracy demonstrations in Hong Kong were dealt a blow when Beijing planned on imposing new security measures aimed at “improving legal and enforcement mechanisms,” jeopardizing the territory’s autonomy. This maneuver is a continuation of the slow decay of the “one state, two systems” model that allowed Hong Kong to maintain its British-implemented government system for 50 years.
Closer to home, the US Fed Chairman said a week ago Sunday, “there is no limit to what we can do,” suggesting if need be, additional monetary stimulus would be provided. Later in the week, Treasury Secretary Mnuchin told reporters the White House wanted to wait for the impact of current fiscal stimulus, a sentiment shared by many on the right side of the aisle and voiced at the passing of the latest $3 trillion packaged by the Democrat-controlled House. US economic data during the week reinforced we have a way to go before we hit bottom, with 2.4 million filing for unemployment benefits, bringing the total to nearly 40 million since the start of the lockdown. After last week’s dismal housing starts number, existing homes sales declined 17.8% in April, 17% lower than 2019. On this side of the border, the Canadian number was worse with national home sales falling 56.8% on a month-over-month basis with listings decreasing by 55.7%. This is not surprising, considering the lockdown and the reluctance to venture far from home, coupled with the economic uncertainty.
With all the predictions of a market retreat after the bounce from the March lows (the strongest “bear market rally” in 75 years), the market is quite resilient to weak economic data and news. The market tends to be forward-looking, so the disconnect from the economic fundamentals is not all that unusual in normal conditions. However, these are far from normal conditions. The last time we experienced the magnitude of change expected in our future was in the 1930s when mechanization shifted a rural agricultural workforce to a manufacturing workforce. Today, we are mostly a service economy with manufacturing moved to lower-cost offshore locations, primarily China and southeastern Asia. Supply chain disruption will require the repatriation of deeming essential manufacturing. This transfer of critical manufacturing will not happen overnight and will confuse economic relationships, causing further tensions among competing players.
From a service perspective, the “virtual” world is upon us. What is most disturbing is the cause of this transition and economic devastation, which was organically taking place, is being externally accelerated by fear for our health. This has never happened in the history of humanity. When we look back on this event, it may prove hard to believe the trigger for this transition was driven by the innocuous flu when compared to other more devastating and more persistent health conditions and wonder how it happened.
In conclusion, we do not think everything is fine with the market and that we are going to have a straight line to recovery. Whether this complacency continues, time will tell, but the market could be setting up for summer volatility in what is usually a quieter period. We expect it will be choppy at best and expect increasing volatility as we move through this challenging period of social, economic and political transition to a new normal.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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