Monday, July 13, 2020


As of June 30th, stock markets worldwide have rallied after the crash in March, but are still negative year-to-date.The S&P/TSX Total Return Index rose 17% in the last quarter, reversing some of the decline in the first quarter. Year-to–date the index is still down 7.5%. 

Stock market rally has been fueled by an unprecedented level of fiscal and monetary support. Governments around the world have provided trillions of dollars to individuals and companies to offset the effects of lockdown due to the coronavirus pandemic. Central banks have pumped huge amounts of liquidity into the financial markets. So far, this has been successful in staving off economic collapse, and financial distress from high levels of unemployment.

Investor enthusiasm for the stock market, particularly in technology stocks, is now a cause for concern, given the high valuations of companies whose own forecasts for future income are either non-existent or highly uncertain. While the broader US market like the DOW and S&P 500 are still in negative territory, NASDAQ index is up 12% this year. It contains the large US technology stocks such as Amazon, Apple, FB, Google, Netflix, Tesla, which are all at all-time high prices. In Canada, Shopify accounted for nearly 40% of TSX return this quarter. It is indeed one of the fastest growing companies in Canada but its stock price is now such that it will take ten years of 100% annual growth in earnings to make it reasonably priced.

Part of the explanation for this phenomenon seems to be that fifteen million NEW investors (and growing according to discount brokers) who at times buy a fraction of a share, have wildly exaggerated the stock market moves. The pandemic has induced an intuition that all we have taken for granted about the economy and businesses will change. There is little room for old economy stocks.  This has significantly reduced investor enthusiasm for sectors like utilities, pipelines and even banks, yet these are the sectors that are likely to be part of the solution. Return of businesses to operation and a slowdown in the river of money flowing in from central bankers and governments may bring things back to balance.

The good news is that Canada, unlike the US, appears to have done a good job in reducing the spread of the covid 19 and stands in good stead to be able to re-open the economy soon, if done in a thoughtful manner. In the meantime, collecting dividends at rates that are multiples of bonds from companies like banks and utilities, as well as preferred shares from companies that are financially sound, makes sense.

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