Glimmers of Hope
While the United States and many other Western countries are experiencing the deepest economic downturn since the Second World War, North American stock markets have staged a dizzying rally since the bottom that they hit on March 23rd, 2020. By August 7thth, 2020, the S & P 500 index closed at 3351 and staged a staggering rally, having climbed 49.8% from the market bottom of 2237 that it hit on March 23rd 2020. As a mater of fact, by June 5th, 2020, the S & P 500 index staged its biggest 50-day rally ever, having climbed 43% from the market bottom. Strong 50-day rallies are often exceedingly bullish indicators. In the past after such rallies, momentum kicks in and equities keep rising.
As economies around the world gradually reactivate, the economic recovery has been moving quicker than anticipated. Surprising gains in employment posted by both Canada and the US for May, June and July, gave the markets hope that North American economies are beginning to heal from the COVID-19 pandemic.
In recent months, despite civil unrest across the United States, escalating American tensions with China and an ongoing battle with COVID-19, North American markets continued to move higher.
Another positive news was that White House health advisor Dr. Anthony Fauci expressed optimism that one of the many coronavirus vaccine trials would prove effective and stated that the U.S. should have 100 million doses of vaccine by the end of year.
The Canadian government continued its pandemic relief measures and announced it will offer cities $2.2 billion in infrastructure money to help cover COVID-19-related budget shortfalls.
The Bank of Canada held interest rates steady and indicated that it expects the economy to resume growth in the third quarter.
What Does the Future Hold?
Obviously, no one has a crystal ball and can tell for sure what the future holds for world stock markets. However, let us look at the arguments for and against a sustained rally in the markets.
Firms like JP Morgan and Morgan Stanley that believe in a V-shaped recovery, are convinced that the recovery is on track and that equities will be making new highs in the coming months. They base their argument on the fact that quarantines are ending, and central banks are printing an unprecedented amount of money to prop up the economy. According to this camp, the combination of cheap money, government income supports, and corporate bailouts are a recipe for an enduring rally.
Those who believe that the stock market has gotten ahead of itself and think that this rally is unsustainable point out two key risks. The first is the deep impact of the economic damage caused by the pandemic that has triggered depression-level job losses and contractions in GDP. The second risk they point to is the lack of breadth in the market rally, which in the early stages was driven by a handful of growth stocks of U.S. tech giants.
Interestingly since mid-May, both risks seem to have subsided. Many laggard stocks have started to rally and close the gap with the leaders. In addition, the gradual reactivation of economies seems to be moving quicker than anticipated with job numbers in both U.S. and Canada surprising economists.
While the recent rise in North American markets has been remarkable, it is for exactly this reason that I believe the best strategy is to stick with your long-term plan for your portfolio. Months ago, had we imagined a global pandemic, a gradual re-opening of economies after an extended shutdown and protests throughout America all taking place as we head into the summer, you would have been hard pressed to find someone predicting that markets would continue to move higher right through it. Yet here we are.
If you have already mapped out a long term investment plan with your financial advisor, you have the luxury of being able to observe surprises in either direction in the context of a longer-term strategy; and regardless of where markets go from here, such a perspective is valuable – particularly the next time we are faced with strong volatility.
Tina Tehranchian, MA, CFP®, CLU®, CHFC®, MFA-PTM (Philanthropy)is a FP Canada TM Fellow and a senior wealth advisor and branch manager at Assante Capital Management Ltd. in Richmond Hill Ontario. She can be reached at (905) 707-5220 or through her website at www.tinatehranchian.com.