”Like a bridge over troubled water I will ease your mind.”
- Simon and Garfunkel, Bridge Over Troubled Water
One of the worst-ever months for the global economy was also one of the best-ever months for equity investors. Global equity markets shrugged off negative economic data, preferring to focus on a post-pandemic economic recovery. Global equities (measured by the benchmark MSCI World Index) rose 11%, 28% above the Index’s March low.
The global turnaround will take various shapes (V, W, U or L) depending on the sector. We could also see a variable recovery – some countries, regions, industries and markets will bounce back more quickly than others.
Sectors like technology, communication services and consumer staples will likely keep to their smooth upward path. Manufacturing and services may experience a sharp V-shaped upturn when social-distancing rules are eased. There will be no quick fix for restaurants, travel and live entertainment as consumers stick close to home and delay buying non-essentials.
In April, riskier asset classes such as equities and credit performed well thanks to positive news on multiple fronts. Central bankers committed to purchasing credit assets, which eased liquidity constraints and fuelled the performance of investment-grade and high-yield bonds. Encouraging news on the pandemic front gave equity markets a boost. Clinical trials for Remdesivir, an experimental COVID-19 treatment drug from Gilead Sciences, showed promise. Physical distancing slowed the growth rate of confirmed cases in many regions and mortality rates began to stabilize.
Until the last few trading days of April, investors were willing to ignore the uncertain outlook from corporate management teams. Then key technology companies also started to pull their guidance. U.S. President Donald Trump dealt another blow to market sentiment when he mused about imposing tariffs on Beijing as punishment for its mishandling of the pandemic.
Canada – Cross That Bridge When You Come To It
Canadian stocks participated in the global equity recovery, enjoying a 10.5% return in April. They were up almost 32% from March 23 when global equities sold off in a historic market meltdown. April’s top performing sector was materials, led by a 42% rise for gold stocks, although the shiny metal’s price climbed just 7%. Canada’s second-best performer was information technology – tech heavyweight Shopify surged 50% last month alone.
April will go down in history thanks to an epic crash in oil prices. The benchmark West Texas Intermediate (WTI) plunged deep into negative territory at -US$38 a barrel, the first time this commodity has ever traded below zero. Two main events caused the price freefall: oversupply that exceeded storage capacity; and a collapse in demand following coronavirus lockdowns and travel bans. By the end of April, however, oil had recovered and closed down just 8%. Recently announced production cuts by OPEC+ (OPEC plus Russia) of approximately 10 million barrels per day, or 10% of global production, likely won’t boost prices substantially. Additional major cuts will be needed to balance supply with falling demand. Surprisingly,Canadian energy stocks were up almost 13% overall for the month, helped by a rally of almost 19% in natural gas prices.
Also for the first time ever, Statistics Canada released a flash – or early – GDP estimate. It predicted a 9% contraction for March, the largest one-month GDP decline on record. Among the hardest-hit industries were travel and tourism, restaurants and accommodation. More than 7.2 million people (35% of our labour force) applied for the Canadian Emergency Response Benefit (CERB), which provides $500 per week in temporary income support for up to 16 weeks. The CERB helps Canadians bridge the gap during this economic standstill, but will neither stop a tailspin in consumer confidence nor stimulate spending.
The Bank of Canada (BoC) added to its quantitative easing (QE) program, announcing two programs to facilitate the purchase of provincial and corporate bonds. Bond interest rates continued to fall across the yield curve while shaky oil prices contributed to an extra-negative outlook for our economy. Despite lowered interest rates, the loonie climbed by three cents from its March lows. This was likely due to weakness in the U.S. dollar, which sold off when riskier assets became more popular in April. The greenback is typically considered a safe-haven currency amid heightened market volatility. We expect our dollar to hold its current level if volatility subsides.
We learned that Tiff Macklem will be the next BoC Governor, replacing Stephen Poloz when his term ends in June. He held the post of senior deputy governor under former Governor Mark Carney and was a front-runner for the job. At his first press conference, Mr. Macklem expressed an aversion to negative interest rates, an indication that the BoC will not substantially shift monetary policy from its current course.
United States – Burning Bridges
Consumer spending, which drives the U.S. economy as it accounts for over two-thirds of U.S. GDP, posted its steepest monthly decline on record, sliding 7.5% in March. Measures that prompted shoppers to tighten their belts remained largely in place, foreshadowing a significant downturn in April as well. This sharp pullback damaged the U.S. economy, causing firstquarter GDP to tumble 4.8%. Pandemic fallout triggered over 30 million Americans to file unemployment insurance claims. Their confidence shaken in April, consumers increased savings and hung back on major purchases.
The U.S. Federal Reserve (the Fed) continued its unwavering support of the economy, announcing additional QE measures and holding interest rates at historic lows. Fed Chair Jerome Powell acknowledged the importance of reopening the economy quickly to restore consumer confidence. Because the Fed cut interest rates three times in March to land near zero, it will make asset purchases a key part of its aggressive monetary policy. U.S. interest rates were relatively unchanged over the month.
U.S. stocks continued to recover, with investor confidence reinforced by unprecedented policy support from the U.S. government and central bankers. The S&P 500 bounced back by 12.7% in April, up over 30% from March 23 lows. Strong U.S. sectors included energy and consumer discretionary stocks – some of the hardest hit in the recent COVID-19 sell-off. Earnings season was in full swing for many American companies. Apple exceeded Q1 earnings estimates, but declined to provide a projection for Q2. Amazon said that revenue growth from stayat-home orders would be offset by pandemic-related costs.
Europe and the U.K. – Water Under the Bridge
In Q1, the eurozone economy shrank at its fastest pace on record, contracting 3.8% after the coronavirus forced a regionwide shutdown. Italy, France and Spain all recorded significant economic contractions.
European Central Bank (ECB) President Christine Lagarde warned that eurozone economic growth could fall between 5-12% this year. She said the ECB is fully prepared to increase emergency support measures and use all its tools to combat the downturn. European equities rebounded by 6% in April, lagging recovery in global equity markets.
On the mend from his own grave bout of COVID-19, British Prime Minister Boris Johnson returned to work and the challenge of how to restart the economy. Britain’s government has been widely criticized for initially delaying mass testing and failing to order lockdown restrictions. The U.K. is on track to be one of the region’s hardest hit nations, with pandemic-related deaths now exceeding those of Italy and Spain. Brexit talks with the EU recently resumed, with Parliament firmly committed to a new trade deal by year’s end.
China – The Road Less Travelled
As China emerged from its own lockdown, the Shanghai Composite rebounded from March lows and rose 4% in April. Although the rebound in Chinese stocks was muted compared with most other markets, the March sell-off of Chinese stocks was less severe. Chinese stocks (measured by the Shanghai Composite) remain a top performing equity market this year.
While April was a quarantine month for the developed world, China attempted to restart its economy after a two-month shutdown that halted economic activity for most of Q1. Chinese GDP contracted a stunning 6.8%.
Although lockdown orders were lifted, Q2 GDP is also likely to shrink. Despite a fairly strong industrial and manufacturing recovery, many citizens remain fearful of COVID-19 and consumer spending has been slow to pick up. In addition, lockdowns in many other countries did not happen until early March. China’s mainly export-driven economy hasn’t yet felt the full brunt of battered global demand.
On a positive note, the country has mostly avoided a secondwave outbreak after the economy began to re-open in April.
Japan – A Bridge Too Far
Japanese equities rewarded investors with a 6.8% Nikkei rebound in April; however, Japanese stocks underperformed North American markets.
Prime Minister Shinzo Abe finally relented and on April 16 declared a nation-wide state of emergency. His hesitation sprang from concern that lockdown measures would take a heavy toll on an already fragile economy.
To cushion economic fallout, Japan’s government passed a US$1 trillion stimulus plan that will give direct payments of approximately US$935 to every Japanese citizen.
Our Strategy
One market driver remains the key source of uncertainty: the COVID-19 pandemic.
News from this front is encouraging. Cases are declining in some of the worst-hit regions in Europe and North America. In China, Australia and New Zealand, new cases are approaching zero. Hospital ICUs don’t appear to be overwhelmed. With curves flattening in select regions, governments are relaxing physical-distancing rules that led to extreme economic shutdowns. Hope for recovery is within sight.
Encouraging news has helped ease uncertainty that was clouding our outlook for asset classes. Concerns now centre on a potential second round of infections once economies re-open, plus the unknown shape of the economic recovery. This slowdown might well extend into Q3. Current estimates for earnings this year are being ignored.
Even though the fog is lifting, we don’t yet know what the next leg of this journey looks like. We suspect that recovery is on the horizon for many areas of the economy, while others will have a steep hill to climb. Until we have better visibility, a neutral stance on asset allocation remains warranted.
The Last Word
Volatility created by the COVID-19 pandemic has largely subsided, with many positive developments on both health and financial fronts. Governments and central banks have stepped up to ease economic hardships wrought by the coronavirus and support struggling individuals and economies. Time will tell if they have successfully bridged the gap while we wait for better times to return.
Disclosure
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 Investment Counsel Inc. 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. BMO (M-bar roundel symbol), BMO Private Banking registered trademarks, and BMO Wealth Management trademark are owned by Bank of Montreal, used under licence. BMO Wealth Management is a brand name that refers to Bank of Montreal and certain of its affiliates in providing wealth management products and services. BMO Private Banking is part of BMO Wealth Management and is a brand name under which banking services are offered through Bank of Montreal, investment management services are offered through BMO Private Investment Counsel Inc., a wholly-owned indirect subsidiary of Bank of Montreal, and estate, trust, planning and custodial services are offered through BMO Trust Company, a whollyowned subsidiary of Bank of Montreal. ID327
