Global Markets Commentary
The View From 30,000 Feet
"After climbing a great hill, one only finds that there are many more hills to climb.”
- Nelson Mandela
November was a record-breaking good month for stocks. Equity markets, which don’t like uncertainty, heaved a sigh of relief when Democrat Joe Biden was finally declared president-elect, and then rallied on positive vaccine news. With the election settled, Wall Street was free to rejoice when Pfizer, Moderna and Astra Zeneca/Oxford announced positive COVID-19 vaccine trial results, which could lead to fast-track approvals.
Last month, the MSCI World Index soared 13%, its best monthly performance ever. The Dow Jones Industrial Average hit 30,000 for the first time. The equity rally expanded beyond U.S. growth stocks toward value stocks, which lagged the stock market recovery in 2020. U.S. equity averages reached all-time highs. Bitcoin, the world’s best-known cryptocurrency, also flirted with an unprecedented peak of $20,000.
Despite record-setting stock prices, COVID-19’s relentless upward march looms over the economic outlook. At the time of writing, the global number of cases stands at almost 67 million and climbing, and this novel coronavirus has taken the lives of approximately 1.6 million people worldwide. Each day brings 600,000 confirmed new cases, double October’s levels.
Breakthroughs on the medical front are countering these bleak numbers. Working at break-neck speed, in 10 months scientists created at least three vaccines that are now potentially ready to distribute. Nations are grappling with the logistics of how to inoculate billions quickly, safely and fairly. Based on this progress, we’re very hopeful that life will return to some semblance of normal in 2021.
Canada – Hitting a plateau
Canadian stocks eagerly participated in November’s equity rally. The S&P/TSX Composite rose 10.6% last month and moved into positive territory for 2020. Energy and financials stocks led the index higher. Oil prices hit their highest levels since early March, which fuelled energy stocks. Financials got a boost from two sources: optimism about the earnings outlook for Canadian banks; and an improving economic outlook thanks to remarkable progress in the vaccine quest. Canada’s worst performing sector was materials; this group was weighed down by depressed gold prices brought on by rising U.S. bond interest rates.
Canadian bonds plateaued when interest rates barely budged in November. Overall, our benchmark bond index rose 1% last month. After a steep recovery from a deep valley, Canada’s economy has flat-lined, smothered by widespread lockdowns that were imposed to crush a second pandemic wave. Canada’s unemployment rate fell to 8.5% in November, but remains 574,000 jobs short of pre-pandemic employment levels. The Canadian dollar enjoyed some momentum against the U.S. dollar. Our loonie benefitted from the greenback sell-off and stronger cyclical prices for commodities like oil and copper.
Finance Minister Chrystia Freeland unveiled what she called “the largest economic relief package for our country since the Second World War.” Spending to tackle the public health and economic crisis spawned by COVID-19 will push the federal deficit toward an estimated $381 billion. Programs such as wage and rent subsidies will be added or extended. Minister Freeland defended the debt, saying it is affordable (given low interest rates) and necessary.
Also announced was an additional $100 billion stimulus program aimed at creating a
“greener and more innovative” economic recovery. Minister Freeland reiterated the government’s commitment to doing “whatever it takes” to help families and businesses stay safe and solvent. This approach is a strong indication that our government has learned from its mistakes in past recessions and understands that stimulating Canadian economic growth is a wise way to build back from a large deficit.
United States – Climbing every mountain
Americans had many things to be grateful for this Thanksgiving, including new all-time records for the S&P 500, Dow and Nasdaq Composite. Mirroring Canadian trends, November’s rally was fuelled by a broadening recovery in equities beyond high-growth technology stocks, which have dominated markets in 2020. We observed a rotation out of growth sectors into more value-oriented sectors like industrials and financials. Vaccine breakthroughs could mean a potential end to the health and economic crisis. This cheerful news brought hope that pandemic-damaged industries like travel and leisure could recover ahead of schedule.
The U.S. Dollar Index fell to new 2020 lows when many forces combined to weigh down the greenback. Strong equity markets outside the U.S. prompted investors to sell dollars and buy other currencies. Historically, the U.S. dollar has been a safe-haven asset. With optimism high, portfolios sold off their U.S. dollar holdings.
U.S. bond interest rates rose when investors began to price in the return of inflation. Up to this point, the pandemic has kept prices depressed and inflation low. Meanwhile, investors are betting that government fiscal stimulus will eventually usher in higher U.S. growth and, in turn, inflation.
Politics also delivered reasons to be upbeat. After five anxious days of ballot-counting, former Vice-President Joe Biden emerged victorious and is slated to take the presidential oath of office on January 20.
And yet, U.S. political drama continues. Far from conceding, President Donald Trump is behind a raft of lawsuits challenging results in battleground states. So far, none of these legal gambits has succeeded. The world will be watching on December 14 when the 538 Electoral College electors meet to cast their ballots for president. After that, Georgia’s two run-off races for Senate spots will be cliff-hangers. Georgians vote January 5 to determine whether Democrats can flip Senate control away from Republicans and gain the upper hand in Congress.
In the last days of November, hopes grew that a bipartisan group of Senators would broker a $908 billion compromise relief package designed to reduce COVID-19’s economic and healthcare carnage. Lawmakers are also working to finalize a full-year spending bill before the government’s current funding expires December 12.
Europe and the U.K. – Trying to move mountains
Time is running out for Brexit talks. The U.K. and the European Union must reach a deal and ratify it by December 31, when the current rules on trade end. The risk of a no-deal Brexit remains high, but negotiations are continuing and a last-minute agreement is still possible. If there is no deal, movement between the two regions will be more complicated and taxes will be introduced for goods travelling between the U.K. and EU. These two factors alone are sufficient incentive to get the papers signed.
European stocks enjoyed their own record rally as the Euro Stoxx 50 rose 18%. Some regions hardest hit by the coronavirus – including Spain, Italy and France – boasted the top performing equity markets as a coronavirus vaccine inched closer to reality. Although the eurozone is facing a deep economic crisis, strong manufacturing numbers are evidence of some resilience.
Eurozone finance ministers agreed to revamp the bloc’s crisis bailout fund, a key element in the region’s economic recovery. The European Central Bank hinted at possible new relief measures to counter a second economic lockdown. Although many businesses are shuttered, it’s expected that schools, factories and offices will remain open in order to prevent a full economic retreat in the region.
China – Powering up the mountain
While much of the world is suffering under economic shutdowns, in China the virus is under control and life is returning to normal. The November manufacturing Purchasing Managers’ Index (PMI) was 52.1, up from 51.4 in October, the highest reading since September 2017. China’s November non-manufacturing PMI, which includes construction and services activity, came in at 56.4, the highest reading since June 2012. Chinese stocks participated in the November rally; they returned 5% for the month, yet still lagged most major markets.
China’s recovery began in the industrial sector and spread to the services sector as leisure activities resumed. This widening recovery comes at an opportune time – China’s export advantage has been a key driver of the nation’s output.
Beijing remains on course to taper its emergency stimulus. We expect that China will continue to lead the global economy out of the pandemic-induced recession. The Organization for Economic Co-operation and Development (OECD) projects that China will grow 8% in 2021 and will account for over one-third of world economic growth.
Japan – A Mount Fuji performance
The Nikkei rewarded investors with a 15.4% return in November, making Japan a global leader. The Bank of Japan, which now owns more than 6% of the total value of the Tokyo stock market, scored a record gain of more than US$50 billion.
Investors cheered the Japanese economy, which expanded 5% in Q3 compared with Q2 and ended a streak of four consecutive quarters of contraction. Private consumption largely drove the recovery – it rose 4.7% after lockdown orders were lifted.
COVID-19 cases are rising in major cities, which prompted the government to increase restrictions. To cushion the blow and revitalize the economy, Prime Minister Yoshihide Suga instructed his cabinet to put together another stimulus package that could be worth up to 30 trillion yen (US$290 billion).
Our strategy
Over the last year, our favourable view of equities was based on confidence that central bankers and governments would take the steps necessary to stimulate economic recovery. We favoured U.S. equities because some of the largest “COVID winners” were large-weight U.S. companies. This group includes Amazon, Netflix, Zoom and Apple, which all directly benefitted from our new stay-at-home, work-at-home culture.
We remained hopeful that there would be a vaccine or treatment for this deadly virus, but we were never willing to bet on it within our investment strategy. Now that we have evidence that COVID-19 can be prevented (based on robust clinical trials of multiple vaccine candidates), we can confidently adjust our investment strategy. We expect that one or more vaccines will get the green light any day now. An approved vaccine allows us to broaden our focus beyond the U.S. to equities listed on international equity markets and emerging markets, which will benefit from improving growth.
The last word
As this extraordinary year draws to an end, it is fair to say that the constantly shifting terrain beneath our feet made the ascent about as challenging as it could be. Through it all, we stuck to our disciplined approach. We checked and re-checked our assumptions and strategy like a skilled climber scaling a mountain – that helped us reach the latest summit. We encountered novel conditions that required us to innovate and adjust along the way. On the whole, we agree with the sentiment expressed by English mountaineer Sir Martin Convay: “Each fresh peak ascended teaches something.”
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.
You should not act or rely on the information contained in this publication without seeking the advice of an appropriate professional advisor.
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