The first quarter of 2020 was a period of unprecedented volatility as COVID-19 took hold and lockdowns caused global economic havoc. Risk assets rallied aggressively from their March lows as many countries learned to better manage virus spread and economies gradually started to re-open.

Naturally, COVID-related uncertainty and the lasting effects of the pandemic on the economy are common issues highlighted from the economists and strategists below.  Their viewpoints differ, but overall, a common thread is the notion that the rapid recovery we have seen since late March is not sustainable, but investors should be cautiously optimistic for the remainder of 2020.

BlackRock Outlook: BlackRock advocated for taking advantage of risk assets in strategic portfolios in late-March. The firm has since turned neutral on equities in its strategic framework after the significant rally but keep an overweight in credit. Higher spread levels make up for increased default risk. The team has downgraded U.S. equities to neutral amid risks of fading fiscal stimulus and election uncertainty, and have turned cautious on emerging markets. The team has upgraded European equities as it offers the most attractive exposure to a cyclical upswing. The team is keeping credit overweight because of a global hunt for yield and central bank purchases.

BMO Outlook: BMO MAST expects the whatever-it-takes monetary and fiscal policy actions to remain significant tailwinds for risk assets in 2020, although it does expect market volatility to remain above normal. The team downplays the fear of a second wave and does not expect another round of massive economic shutdowns. The team thinks the loonie has little upside potential as it sees Canadian growth lagging the U.S. in the next 12-18 months. The synchronized policy response of governments and central banks is unprecedented by its speed and size. 0% interest rates could push stock valuations to cyclical highs as investors are forced into riskier assets to generate yield.

Capital Group Outlook: Because this economic decline is policy driven, the team believes a solid recovery is likely as lockdowns end. Easy monetary policy, aggressive fiscal policy and zero-bound interest rates should continue to support equity markets. The recent investor stampede into cash is understandable, but investors should consider the risks of holding excessive cash and trying to find the right time to re-enter the market.

CIBC Outlook: In de la Durantaye’s baseline projection, a vaccine is expected to come in the spring of 2021. If this forecast materializes, the global economy may very well recover faster than generally expected because of the colossal efforts deployed by governments and central banks around the world, with global growth accelerating to +3.4%. This assumes that the global pandemic doesn’t take a turn for the worse. He believes the U.S. economy will recover more rapidly than generally expected. U.S. real GDP growth is projected to average +1.0% over the forecast horizon. With inflation projected to run well below target, the Fed will keep its ultra-accommodative policy stance in place over the whole forecast horizon.

Dynamic Funds Outlook: The team feels the rapid pace of recovery that has taken hold over the past few months is unlikely to be sustained. The spread, particularly in the U.S., will begin to place some downward pressure on mobility patterns and economic activity. It is too early to suggest the risk of a renewed downturn, but the team’s focus has switched to looking for pockets of economic vulnerability. Income support, depressed capital costs, and better economic momentum are working together to help raise the floor under global equity prices. Investors willing to take significant off-benchmark equity positions can reduce the valuation risk in their portfolio.

Fidelity Outlook: Timmer feels the direction the stock market may take from here is not as clear as it was at the end of March. There are some things working in favour of stocks going up—and also against them. On the plus side, earnings look better than expected so far and monetary policy has provided liquidity and support for the recovery. Indicators of internal strength in the market and investor sentiment are also holding up. And, last but not least, there is some optimism around treatments and vaccines for COVID-19. Some of the negatives include the increasing spread of the virus in parts of the U.S. and the potential damper that could put on the recovery as businesses continue to struggle; finally, there may be uncertainty with an election coming up. Overall, Timmer thinks the positives continue to outweigh the negatives.

IA Outlook: As the global economy is showing signs of re-acceleration and the main geopolitical tail risks look poised to take a turn for the better, a structural but careful risk-on strategy should perform well in 2020, according to Gignac. He advocates not overreaching for returns, carefully monitoring and managing risks and, finally, being prepared to be active, as markets should give more opportunities to add value to portfolios.

Manulife Outlook: Petursson sees an economic recovery that is enjoyed globally but perhaps at a different pace market-to-market. In general, equity market gains are unlikely to reflect the full earnings growth as P/E multiples adjust lower (as they typically do in a strong earnings recovery). He believes the trailing S&P 500 Index 12-month P/E ratio falls one or two points through to the end of 2021 to 20x-21x earnings. Despite higher inflationary pressure into 2021, he feels central banks will remain accommodative through the entire period, not looking to raise rates until well into 2022. Yield curves steepen as the recovery combined with the inflationary forces of fiscal and monetary stimulus push longer-term yields higher. Overall, Petursson believes it is a good opportunity to continue to gradually increase the equity weight in his model portfolio by 5% to 60%, bringing his asset allocation back to neutral.

PIMCO Outlook: The team believes that risk assets valuations (equity and credit) are approximately fair, after adjusting for easy financial conditions and assuming a gradual economic recovery. Nonetheless, the distribution of potential economic scenarios over the next 12 months is unusually wide. As such, the team believes investors should maintain a moderate risk-on posture in multi-asset portfolios with a focus on companies with strong secular or thematic growth drivers that are positioned to deliver robust earnings in a tepid macro environment. As always, robust portfolio diversification is critical, but achieving this requires a multi-faceted approach. Duration, real assets, and currencies all can play an important role. The team believes the next few quarters will present a great backdrop for active management as the nature and the pace of the recovery will create many winners and losers. That should provide a plethora of opportunities to add value through sector selection and tactical asset allocation.

RBC Outlook: RBC GAM’s scenario analysis suggests further upside for stocks is possible as long as investor confidence stays elevated, inflation and interest rates remain low, and earnings rebound toward their long-term trend. The base case outlook for the U.S. is for a 7.1% decline in 2020 GDP. There is evidence that the US dollar bull market has come to an end and the team believes the Euro and Yen are to benefit, while the Loonie and British Pound will lag. If faster inflation does eventually materialize, the long-established style trend of quality and growth outperforming value may finally reverse. The team has adjusted the strategic neutral weights in its multi-asset and balanced portfolios in favour of stocks at the expense of bonds. For a balanced, global investor, the team currently recommends an asset mix of 61 percent equities and 38 percent fixed income, with the balance in cash.

TD Outlook: The team has an overall neutral outlook for equities and continues to prefer equities over fixed income. It maintains a modest bias toward U.S. stocks versus Canadian. While there is no definitive way to estimate the degree of damage COVID-19 will cause to corporate and global growth, the team believes in the resiliency of the U.S. economy which should get a much needed boost from accommodative monetary policy and fiscal stimulus measures. Significant downgrades to economic forecasts have increased the probability of a short and sharp recession. The team remains defensively positioned with a neutral view to emerging markets debt while seeking attractive opportunities should they arise.

Source: IA Wealth

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The most common question I have received this year, one that I have asked myself many times, is “how can markets be up amidst the pandemic and economic backdrop?”. On May 29th, we wrote a blog titled “Markets vs. Economy, why markets are only 10-15% off their highs”, which summarized articles by The Globe & Mail and the New York Times on this very issue.

This week, I received a related release from Myles Zyblock, Chief Investment Strategist at Dynamic Funds, which aims to explain the perceived misalignment between the “fair value” of stock prices and current stock prices.

I will try to summarize his article.   Markets go up for two reasons: rising earnings (EPS) or price/earnings expansion.  The former is a very logical reason based on company fundamentals, but the latter is investor sentiment, a more psychological phenomenon.  The table below shows that rising earnings (the fundamental reason), accounts for 41% or less of market performance for time periods under one year:

Thus, when someone asks, “what’s going to happen to markets in the next 3 months?”, a psychologist is apparently better able to answer the question than a financial analyst. Even in a 5-year investment window, “sentiment” still accounts for 44% of market performance. It is not until the 10-year investment horizon mark that fundamental reasons take hold.

I will simply cite Mr. Zyblock for the conclusion:

“So, let’s return to the present day. Stocks have come off the bottom hard since the March low. It sure hasn’t been because earnings were on a tear. It was because P/E multiples expanded; that something has happened to make investors either much more optimistic about future earnings or much more willing to accept equity market risk.  Epic policy stimulus is just an educated guess about what that “something” might be. Fiscal policy makers have injected trillions of dollars into the global economy in the form of income support, loan backstops, and tax breaks. Monetary policy makers have driven interest rates into the floor, provided liquidity backstops, and have bought trillions of dollars of bonds in the primary and secondary markets. G4 central bank balance sheets have grown to more than 50% of their GDP, and the promise is to do even more.  With this much liquidity hitting the system, is it really any wonder why the stock market’s P/E multiple has responded so positively? A simple “excess liquidity” indicator, measured as money supply growth relative to GDP growth, has exploded upwards. Over time, excess liquidity has shown a strong and reasonably stable positive correlation with stock market valuations. It is hard to see a sustained or significant period of valuation compression when the policy authorities are in full panic mode. As the old Wall Street investment adage goes, ‘markets stop panicking when policy makers start panicking’.”

Please reach out to us with any questions or comments. We wish everyone a healthy and happy fall.

Source: Dynamic Funds

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As a refresher, we want to let you know what e-solutions are available to you:

• You can login online to Fundex Wealthview and view your account balance, individual holdings, investment performance, quarterly statements, and RRSP contribution receipts (statements and tax receipts for nominee account holders only).
• On Wealthview, you can update your address, e-mail, and telephone number. We will be informed of the update, as will all fund companies you have investments with.
• On Wealthview, you can securely upload documents. This will be more secure than sending documents over e-mail and is a useful tool for highly sensitive documents or during tax season.
• If you have a Nominee account, you can contribute to it the same way you make a bill payment, with your online banking.
• You can sign almost all order entry forms electronically, with just a password and a few clicks.
• You can meet with us virtually by Zoom or by telephone.

If you want detailed instructions on any of the above options, kindly let JoAnne know and she can send you instructions by email or walk you through the steps by phone.

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It is important to remember that in the long run, who sits in the White House has little bearing on the direction of stock markets. However, there can be market volatility both before and after the election has taken place. With that said, let’s take a look at Joe Biden’s platform and its potential market implications:

TAX PLAN

Biden proposes a host of changes to the tax code, which would impact both corporations and high-income households:

• Corporate tax increase from 21% to 28% (was 35% prior to 2017)
• Imposing 15% minimum tax on profits
• Doubling the existing minimum tax on profits for foreign subsidiaries of U.S. firms from 10.5% to 21%
• Personal Income exceeding $400,000 increased from 37% to 39.6%
• Personal Income exceeding $1,000,000 would see dividend and capital gains income taxed the same as normal income

Market implications:

• Investors potentially selling stocks to avoid higher tax rate
• The most significant income tax increase since the periods following the World Wars and the Great Depression
• Note that given the downturn, tax increases are likely inevitable regardless of which candidate wins

HEALTH CARE PLAN

Biden wants to improve upon the Affordable Care Act (i.e. Obamacare):

• Increase financial support to those struggling to afford insurance
• Provide a government-run option to compete against private insurance
• Lower Medicare eligibility from 65 to 60
• Plan cost estimate is $750 billion over 10 years

Market implications:

• Increased government spending thus continuing the deficit from previous administrations
• Effect on healthcare stocks, lowering profitability
• Note that drug companies are likely to be hit with price controls regardless of who wins as Trump – in an effort to pre-empt the Democrats – recently signed Executive Orders aiming to lower prescription drug costs

ENVIRONMENTAL PLAN

$2 trillion, four-year plan proposed for green energy, Biden’s most expensive platform proposal:

• The proposal calls for fossil fuel use in cars, as well as to generate electricity, to be eliminated by 2035 with the economy becoming net-zero carbon emissions by 2050
• Does not include ban on oil and fracking (Ohio and Pennsylvania, two key battleground states, have significant fracking operations and proposing a ban would hurt him in these states)

Market implications:

• Significant increase in governmental spending
• New restrictions and tightening environmental regulations, reducing subsidies to fossil fuel companies
• Increased focus on green energy companies

The belief is that the tense U.S.-China relations will keep big U.S. tech companies from being broken up, since neither party wants U.S. tech companies to become much smaller than their Chinese counterparts. However, there is an increasing appetite for stronger regulations on the tech firms, and remember that Biden’s 15% minimum corporate profit tax would impact the tech giants, who currently pay almost no tax.

The U.S. federal deficit – and debt level – is ballooning. Neither party has produced a platform whose tax increases (revenues) and/or budget amendments (expenses) come close to financing their agendas. Further increase in the federal debt could force the U.S. government to keep rates lower than inflation to help the government chip away at its debt level (similar to post-WWII). Lower rates tend to fuel equity markets, as access to cheap money can help companies expand their internal infrastructure, hire more people, etc.

A tight election result could cause a significant market disruption, especially if one candidate refuses to accept the results. President Trump has repeatedly claimed the election process is “rigged” and has set the stage to challenge the election’s legitimacy if he loses. Mail-in ballots are unlikely to be completely counted for days or weeks after the November 3rd election. 24% of votes in 2016 were cast via mail-in ballot, and that number could increase as people attempt to avoid COVID infection as the virus continues its spread throughout the fall.

The most recent example of a drawn-out election occurred in 2000, when Al Gore did not concede defeat until well into December of 2000, about 6 weeks past the election day.

A Democratic sweep of the White House, the House and the Senate would likely result in the most market movement in the near-term. However, the Democrats’ promise to increase spending should help to stabilize rocky markets. An outcome where the Senate and House are controlled by opposing parties would require opposition buy-in to enact significant legislative change.

There is no proven link between a president’s party and market returns. Ultimately, investors should focus on things they can control, such as their rate of savings, utilizing existing tax laws to their best advantage, and of course, remaining invested in a well-diversified, high quality portfolio.

Sources: National Bank, Forbes

The post Trump vs. Biden: Market Implications of the U.S. Election appeared first on Smof Investment Manager, LLC.

• Market Timing in the Long Run
• Reasons to sell
• Average Returns
• Equity Performance in the long run
• Dollar Cost Averaging or Lump Sum?
• Home Country Bias
• Should Investors Fear Recessions

MARKET TIMING IN THE LONG RUN

REASONS (NOT?) TO SELL

“AVERAGE” RETURNS

EQUITY PERFORMANCE IN THE LONG RUN

DOLLAR COST AVERAGING VERSUS LUMP SUM INVESTING

HOME COUNTRY BIAS

SHOULD INVESTORS FEAR RECESSIONS?

Source: National Bank

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