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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