Current Market Conditions

Pandemic Effects and Response

2020 has been an unbelievable year in terms of stock market returns.  We started on a high note after having a very strong finish to 2019 and that briefly carried over into the start of the year.  Then of course we had an unprecedented drop due to the global pandemic in February and March.  This was the fastest bear market on record, and it was met with an equally unprecedented fiscal and monetary response by governments and central banks around the world.

This response to the pandemic led to a dramatic recovery in stock indexes which was largely led by technology companies who were either unaffected by lockdowns or whose business model was actually helped by the lockdown.  These companies included stay at home businesses like Netflix, Apple, Spotify, Amazon, Microsoft, and Facebook.  These large cap technology companies have all risen by 25% plus, and in fact Netflix, Apple, Spotify, and Amazon are all up over 50% since the start of the year!  Pile on top of that some smaller technology companies like Zoom and Peloton which have both more than tripled their values this year, and it is clear that technology is winning the battle against COVID, at least when it comes to stock prices.

Other more traditional companies have not fared so well.  Banks and insurance companies are all still below their pre-COVID highs, and some are down substantially.  Royal Bank is still down about 10% from its 52 week high despite a recovery over the summer.  JP Morgan Chase is down almost 40% from it's 52 week high.  Insurance companies have also been hit hard as Manulife Insurance is down 33% from it's 52 week high and Sun Life is down about 20%.  

On the other hand, large cap retailers have proven that they can be resilient as Walmart and Costco are both up 20% on the year.  Retailing in general has fared very badly though as there has been over 11 major retailers who have declared bankruptcy as a result of the pandemic. Some of the worst hit areas have been energy and commercial real estate.  The energy problems were exacerbated by a short lived price war between Saudi Arabia and Opec+ ally Russia.  

Dramatic Declines in Energy Stocks

Although the price war only lasted a couple of months, prices of WTI and Brent Crude are still well below the prices they started the year at.  This has led to dramatic declines in energy stocks. Exxon Mobil is down -45% this year and in Canada Suncor is down -57%.  That's despite seeing a pretty dramatic price recovery from the lows in March.

Travel Sector is Crushed

In commercial real estate, Brookfield Property Partners is down -30% YTD.  Clearly these businesses have been hurt badly by the pandemic. Another sector which has been absolutely crushed is anything related to travel.  Airlines, Cruise Lines and Hotels have all been decimated this year.  Air Canada is down -67% on the year.  In the US, Delta and United Air lines are down 45% and 59% respectively.  Cruise lines like Carnival are down almost -70% on the year.  Hotels have also been hurt badly. Wynn Resorts is down -48% this year and MGM Resorts International is down -34%.  Even a technology company like Booking Holdings is down -18% as people are just not booking as many trips right now.

Retail Investors are Becoming Influential

Clearly anything related to the travel industry is hurting right now. Another theme we've seen this year is the retail investor becoming very influential on the stock prices of a handful of retail favourites.  At the top of the list is Tesla of course.  Tesla has improving fundamentals in its business but there is nothing in the numbers that would justify an over 400% increase this year.  It is now the world's largest car company in terms of market cap despite only making a fraction of the number of cars of its competitors.  Bulls of the stock would argue that Tesla is a technology company, not a car company, and therefore it's potential justifies it's astronomical stock price.  Maybe so, but it's definitely true that Tesla's stock price rise has been at least partly fueled by retail investors who have piled into the stock en masse.  

We can see that the number of self directed stock trading accounts have exploded in both Canada and the US.  This means more and more amateurs are trying their hand at investing.  While this isn't necessarily a bad thing, this kind of behavior often is a warning sign of a pending market crash.  It's certainly something that I am wary of.

Central Bank Intervention

There's been some clear winners and some clear losers in the markets this year and overall the markets have reached new all time highs while the economy has deteriorated for the most part.  This is a potentially dangerous situation but there is one X factor which seems to be supporting the markets right now.  That X factor is central bank intervention.  Central banks have an unlimited fire hose of money to put out any fires in securities markets and they are using them right now.  This means that even though the underlying economy might be bad, the prices of many investments will go up regardless.  

This is a very unpredictable and dangerous situation to be in. What can we do about this?  The best thing we can do is to do what we've always done.  Stick to high quality businesses and pay a reasonable price to own them.  Then hold them for the long term.  Time is the friend of the truly great businesses and they will be the best placed to weather storms like the pandemic.  In fact we can see that even in troubled sectors like energy, the best companies can still take advantage by making acquisitions at rock bottom prices.  We've seen that a lot in the last couple of months with companies we own, and I expect to see more of it in the future.

Stick to Your Plan

One thing you cannot do in times like this is panic or change your strategy.  If you do these things, you will be asking for trouble.  Stick to your plan, don't get greedy, and never ever panic.  If you can avoid these mistakes, you will do fine, regardless of what the markets throw at you.

- Craig White, BA, LL.B., CIM

Craig White is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Craig White an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.