The Canadian and US markets continued the bounce from the previous week with the TSX jumping 2.2% and the S&P 500 advancing 3.8%, the best week since early July. In the more broadly-based S&P MidCap 400 and the Russell 2000, the move was encouraging with both indices climbing 4.87% and 6.35%, respectively. The Nasdaq added another 4.56%, bringing the year-to-date performance to just over 29%.
The impetus for Canada’s market move was better-than-expected job growth numbers and a new financial aid package announced by Prime Minister Trudeau. In September, 387,000 jobs were added, exceeding expectations. The domestic economy has recovered 75% of the jobs lost since March. The unemployment rate fell to 9% from 10.2%. Additionally, Prime Minister Trudeau announced a plan to provide financial aid to businesses in the form of rent in areas most impacted by the shutdowns.
In the US, politics dominated the news wires with the on-again, off-again stimulus talks between Treasury Secretary Mnuchin, House Speaker Pelosi, and the White House. Most agree additional stimulus is necessary to keep the economy on the current pace of recovery, but as usual, the devil is in the details. There was also talk of targeted, now called standalone, measures to help specific sectors like the airlines. The major stumbling block is the insistence of the Democrats aiding state and local governments. Late Friday, the market had another boost as the Republicans increased the ante to $1.8 trillion from $1.6 trillion. President Trump’s miraculous recovery from COVID also uplifted market sentiment and spurred optimism that his treatment’s efficacy might hopefully become free and available to most Americans.
On the US’s economic front, the weekly initial unemployment claims remain persistently high, coming in at 840,000, marginally higher by 3,000 from the previous week. Encouraging, however, were the continuing claims dropping just over a million to 10,976,000 from 11,979,000. As the recovery has slowed from the earlier “snapback,” it is becoming more apparent that the damage could be irrecoverable for some sectors. For example, restaurants cannot stay in business with current restrictions at 50% capacity or even 75%. It is estimated that 25% of small businesses may have already shut down. Generally, many people are nervous about leaving home, and based on airline traffic numbers, travel is out of the question.
TSA Checkpoint Foot Traffic: 2020 vs 2019
While many are pleased with the recovery rate, the recovery for many is too little too late. The new work-from-home environment sounds like a great idea, but it has also changed the work environment from social interfacing to one of social isolation. The combination of fear of leaving home and change in the work environment is causing behavioral changes, which will impact spending patterns. All this means is “business as usual” is a thing of the past, and the best we can hope for is a partial recovery.
We are starting to see more and more experts arguing that current social distancing policies and lockdowns are causing irreparable damage both physically and mentally, especially with the underprivilege who are being disproportionately harmed. If the third world countries are considered, the damage is staggering. Low-cost manufacturing jobs in the third world took the biggest hit, and then there are problems with supply chain disruptions that impact the distribution of food to those in the most need. The magnitude of fear and economic uncertainty is causing changes in behavior. The conclusion that is gaining acceptance among those voicing this opinion is that the cure was far worse than the disease.
A partial recovery, the acceleration of the mountain of debt to stimulate the economy, behavioral changes, and changes in how business is conducted and the workplace, at some point, will have a significant impact on both fixed income markets and equity markets.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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