“The human species thinks in metaphors and learns through stories.”
Mary Catherine Bateson
Last January our commentary discussed Hollywood’s annual holiday tradition of releasing the biggest movies at Christmas. This year, thanks to the pandemic, Hollywood blockbusters were in short supply. Many of us sheltered in place for most of 2020, watching hit series on streaming services such as Disney+ or Netflix instead of the big screen.
Over this extraordinary year, we were consumed by events far more compelling than anything Tinseltown could produce. Life imitated science fiction movies like 2011’s Contagion.
At this time last year, we thought the 2020 U.S. presidential election would be the most dramatic story line. Instead many stories garnered significant attention. Racial injustice seized centre stage following the death of George Floyd last May. Demonstrations and marches around the globe focused a spotlight on individual responsibility to promote racial equality, diversity and inclusion in our communities and workplaces.
November’s presidential election was one of the most unusual in recent memory, delivering ongoing plot twists and turns. President Donald Trump refused to concede his loss to President-elect Joe Biden. The President’s multiple lawsuits and unproven allegations of fraud have kept the election on front pages since mid-November. Even so, it has been a momentary distraction from the pandemic, which was the most compelling story for every person on the planet this year.
Last March, stock markets experienced one of their most dramatic downturns in history when COVID-19 forced economies to shut down. What followed was one of the fastest and steepest global recessions in decades. Then came a rapid recovery for both stocks and the global economy.
The 2020 investing plotline began as “riches to rags” and ended with “rags to riches.” There was money to be made in several areas this year. Companies that benefitted from global lockdowns and work-from-home directives topped the leaderboard: Netflix, Amazon, Zoom, Peloton and Shopify are good examples. Overall, technology led global stock markets higher. Corporate and high-yield bonds recovered from a deep freeze that started with a March sell-off. Central banks worldwide gave them a boost – they set extremely low interest rates and introduced quantitative easing programs that allowed central bankers to purchase these assets. The recovery was K-shaped: some sectors rebounded quickly while others remained weak. Energy, travel, leisure and real estate were sectors to avoid in 2020.
Canada – It’s a long story
It was a recovery story for Canadian stocks, which delivered a 2.2% return this year (measured by the S&P/TSX Composite) fuelled by strong performance in the technology and materials sectors. Technology stocks got a boost from the incredible performance of Shopify, a software provider that helps merchants sell online. Strong commodity prices in gold and forest products buoyed materials stocks. Energy was the worst performing sector for the S&P/TSX, with oil prices dropping 22% from the start of 2020. A price war between Saudi Arabia and Russia slammed oil prices. Even after the squabble ended, oil remained depressed when global growth slowed thanks to the fallout from COVID-19 lockdowns and factory closures. With few people travelling, jet fuel consumption plummeted.
Canadian bonds became key in the investing landscape this year. The Bank of Canada (BoC) moved swiftly to provide liquidity and support in response to the coronavirus. Our central bank reduced its target for the overnight rate to 0.25% and began an unprecedented level of quantitative easing and forward guidance. The goal is to keep interest rates low so that borrowing costs can remain low. At its most recent policy meeting, the BoC stayed the course and kept its commitment to purchase bonds at a rate of $4 billion per week.
Our central bank expects weakness in the Canadian economy following a second wave of COVID-19 cases and a return to lockdowns. Unemployment sits at 8.5%, significantly higher than pre-COVID levels of 5.5%. Inflation remains muted and is well below our central bank’s target of 2%. Economic data such as unemployment, inflation and economic growth will be difficult to forecast in 2021 because of the competing forces of regional shutdowns and uncertain timelines for vaccine rollouts. Nevertheless, we expect economic growth and improved job numbers as the year unfolds and more Canadians are vaccinated.
The loonie’s performance was a pleasant surprise – it recovered from March lows and in December reached new heights for the year. Our dollar benefitted from investors’ increased appetite for risk. The U.S. dollar index sold off when safe assets such as the greenback became less desirable. We expect the loonie to continue rising as global growth picks up and commodities are more in demand.
United States – Truth is stranger than fiction
U.S. stocks fell drastically when COVID-19 infections began to create fear and panic, then ignored the negative impact of economic shutdowns, uncertainty surrounding the U.S. election, and the threat of second and third COVID-19 waves. Closely mimicking 2019, the S&P 500 climbed 15.5% in 2020. Even so, this performance paled in comparison to the 43.4% rise in the tech-heavy Nasdaq Composite.
After a show of great resilience, U.S. consumers started to leave their wallets in their pockets in late 2020. Surging virus cases are weighing down the economic recovery. Fading of federal aid programs had a negative impact on household incomes. Americans are awaiting the outcome of the pandemic-relief package passed by Congress but criticized by President Trump. The President would like to see $2,000 cheques issued to Americans instead of the proposed $600 relief – even though most Republican senators oppose the higher amount.
In March, the U.S. Federal Reserve (the Fed) acted decisively; it cut interest rates to near zero and began an asset-purchase program. These policies are likely to remain in place for the foreseeable future.
The 2020 presidential election story has all but played out as President Trump completes his last month in office. Legal battles seem all but over since no evidence of voter fraud has emerged and the President has conceded that President-elect Joe Biden will take office on January 20. Nevertheless, President Trump is sticking to his false narrative that the election was rigged. The Electoral College formalized Joe Biden’s victory on December 14. The traditionally uneventful certification process that followed in January concluded, despite the storming of the U.S. Capitol which resulted in a riot that delayed the process.
The other sidebar story occurred in Georgia, where two key Senate seats went to Democratic senators. With Democrats winning both seats, Kamala Harris will have the tie-breaking vote as Vice-President and the Democrats have regained the upper hand in Congress. With the Senate under Democratic control, President Biden will have a much better chance of making significant policy changes. Some of these changes include tax policy and a greater fiscal stimulus package.
Europe and the U.K. – The Brexit saga concludes
Chaos was averted when the U.K. and European Union finally reached a Brexit deal – nearly five uncertain years after Britain voted to leave the EU. This new pact covers everything from trade to the number of fish each side can catch. Both sides will continue to trade without tariffs, but the free flow of workers between the two economies will end.
Excitement about approval and distribution of the first COVID-19 vaccine quickly faded when Britain discovered a new, highly contagious strain of the coronavirus. Many countries immediately closed their borders to British travellers and much of the U.K. shut down to stem the spread.
Although European equities recovered from a sell-off spurred by the pandemic, they ended 2020 lower by 5% (measured by the Euro Stoxx 50). Recovery in Europe took longer due to the outbreak’s severity in tourist regions of Italy and Spain. Ongoing anxiety over Brexit negotiations caused U.K. equities to lag European markets: they fell over 14% for 2020.
China – This year’s big story
Back at the beginning of January 2020, China announced its first cases of a novel coronavirus. Global markets didn’t take notice until the end of January, when cases started to climb and travellers exported COVID-19 around the world. In February, stocks shrugged off fears of a pandemic and hit record highs. Then the contagion changed everything, prompting travel bans, border closures and cancellation of professional sports.
By this point, China was well on its way to tamping down the virus spread through Draconian lockdown measures. It was the first major economy to stagger under the weight of COVID-19, and the first to bring it under control. Chinese equities were among the earliest to recover, but they did not keep pace with global markets in the closing months of 2020 as other markets regained their footing. The Shanghai Composite enjoyed a positive return of 13.9% for 2020.
With social and economic activities returning to normal, and exports increasing, the country’s GDP has rebounded rapidly. China is the only major economy that showed positive economic growth over the last 12 months. The
Middle Kingdom is expecting a full bounce-back and 8% GDP growth next year. Beijing will turn its attention to implementing its 14th five-year plan (2021-2025). Priorities will include boosting domestic demand, enhancing social security, changing taxation to improve income and wealth equality, and investing in technology.
Japan – A tale of recovery
Throughout 2020, most developed countries grappled with COVID-19; however, Japan’s economy was already struggling from the aftereffects of a sales-tax increase. Fortunately, China’s recovery helped fuel Japan’s recovery. GDP growth for Japan turned positive in Q3 at 5% and rose by another 1.8% in October. Japanese equities performed well in 2020, with the Nikkei up by 16%.
Under new Prime Minister Yoshihide Suga, the government remained committed to supporting the economy. For the next fiscal year, Japan’s largest-ever budget will be 107 trillion-yen (US$1.03 trillion).
Our strategy
Our optimism for the future is tempered by caution because things rarely go exactly as planned. Much of our positivity rests on a smooth global rollout of the COVID-19 vaccine, although significant distribution challenges could make the timing of mass vaccinations uncertain.
We are optimistic that a new U.S. administration will not materially change current policies. In fact, it may add stability and reduce trade tensions. Nevertheless, fresh and unexpected political turmoil could very well emerge.
We will maintain focus on key market drivers – not the story of the day. Overall, we continue to favour risk assets (such as global equities and credit) over government bonds.
The last word
This year reminded us why it’s vital to stick to the golden rules of investing.
First, don’t fight the Fed. When the Fed and other central banks stepped up in March to provide liquidity and support for assets, and lowered interest rates for borrowers, it set a market bottom for risk assets.
Second, time in the market is more important than timing the market. Missing the best days this year would have been costly. Avoiding the brisk sell-off in February and March would have been ideal, but it only took a few months to recoup those losses. The biggest market rebound happened one day after the market bottomed on March 23. The S&P 500 rose 9% and the S&P/TSX went up 12%.
Third, invest according to your guardrails of risk tolerance, time horizon and investment objectives. This will ensure that discipline overrides emotion.
Overall, 2020 was long and difficult for many – not just investors. If the stock market is truly a leading indicator of the future, it is foreshadowing a year that will tell a better story for all of us.
Please contact your BMO financial professional if you have any questions or would like to discuss your investments.
Information contained in this publication is based on sources such as issuer reports, statistical services and industry communications, which we believe are reliable but are not represented as accurate or complete. Opinions expressed in this publication are current opinions only and are subject to change. BMO Private Wealth accepts no liability whatsoever for any loss arising from any use of this commentary or its contents. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice, tax advice, a recommendation to enter into any transaction or an assurance or guarantee as to the expected results of any transaction.
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