Equity markets were somewhat mixed last week with the TSX flat, the S&P 500 hitting all-time highs exceeding, if only briefly, the highs of February, and the MSCI EAFE losing .7% on the week. Year-to-date, the TSX has struggled to move into positive territory and remains negative at 3.2%. The dominance of the financial sector grappling with the low-interest-rate environment coupled with the energy sector and low oil prices are likely to prevent the TSX from reaching the February highs unless we see a significant turnaround with higher interest rates and oil prices. The tech sector dominated US markets and led the way to one of the fastest bear market recoveries on record, taking only 126 trading days to reach the February highs from the March bottom. Growth stocks once again regained control over value stocks and small caps. The Nasdaq continues to surge ahead, and year to date is up 26.07% compared to the S&P 500 up 5.15%. The broader-based Russell 2000 is still negative at 6.99%, the S&P MidCap 400 is struggling down 7.40%, and the MSCI EAFE trails at a negative 7.4%.
The COVID and economic news this week contained some encouraging developments that may have helped market sentiment. On the virus front, nationally, the reported number of cases is falling rapidly, with the recently hard-hit southern states seeing a significant reduction in the number of cases. Additionally, the number of deaths is also falling precipitously. However, this trend could be short-lived with the resumption of school and university classes. On the economic front, housing showed surprisingly strong increases in both starts and permits. The National Association of Home Builders’ measure of builder confidence reached all-time highs, and existing home sales exceeded expectations for July. We think we are at the initial stages of a Canadian and US trend of an exodus from city centers to suburbia and even further out. Millennials are entering the stage of life when having a family is becoming a priority. City life with COVID restrictions of social distancing is creating difficulties not only for family life but also for the workplace environment, which is also undergoing significant changes. Working from home is not all that convenient in a small apartment or condo. In the US, the hollowing out of city centers is accelerating as civil unrest has led many residents and businesses to become concerned for their safety and question their ability to remain open for business.
Weekly initial unemployment claims disappointed, unexpectedly rising by 136,000 to over 1.1 million. On a brighter note, the continuing claims fell to the lowest since early April (14.8 million). On Wednesday, the US Federal Reserve’s July minutes were less-than-encouraging, suggesting a gloomier outlook while providing assurances of monetary stimulus. The lack of progress on the latest stimulus package from Congress has many predicting a negative impact on future consumer spending and the rate of re-opening. With either side not wanting to give the other side a perceived win going into the election, it is doubtful little will be done other than the absolute minimum stimulus. The virtual Democratic Convention finished off the week with less than inspiring viewership. The same should be expected for the Republican Convention starting this week.
As stated, many times, the current market is being led by a few names, while the average S&P 500 stock is still down 5% to 7% year-to-date. Like other market tops, fundamentals are not driving this market, only this time, we have rates at historic lows and a very accommodative monetary policy. We continue to expect the unexpected.
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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