Covid19 is not going away anytime soon. We do not know when the planes will fly regularly, restaurants open
properly and movie theatres have something to show. Ironically. September lived up-to its reputation as being
the most negative of the months for stocks. Still the S&P/TSX Total Return Index
rose 4.7% in the quarter. Sector performance was widely distributed with the
Industrials, Utilities, Materials, Consumer Staples and Consumer Discretionary
sectors strongly positive while Health Care and Energy were strongly negative.
Year-to-date the index is down 3.1% with Information Technology and Materials
the most positive while Health Care and Energy have been the most negative.
Worldwide stock markets generally rose in the quarter particularly in the US with
technology rich NASDAQ up by 11%.
The Information Technology sector has led the
Canadian market this year fueled by the premise that reduced travel will
continue to spur use of technology in the workplace and online shopping.
Shopify has a weight of 6.4% of the index, a price earnings ratio over 400, a
price-to-book ratio of 26 and a dividend yield of zero. For comparison, The
Royal Bank of Canada has a weight is 5.5% of the index, a price earnings ratio
of 13, a price to book ratio of 1.7 and pays a dividend yielding 4.5%. We
highlighted our concern about the unsustainable enthusiasm for technology
stocks last quarter. This has not changed. However, this is similar to the
dotcom era of the late ‘90s and participation in overvalued securities which
pay no current income for clients is not investment, it is speculation.
One fallout of the pandemic is dropping interest rates all over the globe, nearing zero in North America. This has created a conundrum for balanced account investors. Historically balanced accounts have typically 50% bonds and 50% equity. This means nearly half of the money pays no income and after you look at all costs including management fees, gives a negative return. This means bonds are no longer “fixed” income, it may move up and down like stocks but there is little fixed income. One approach I have used is to mix cash with low volatility income stocks and preferred shares to simulate a bond of old. So far it has worked.
Hot sectors anticipate earnings will come
roaring back. I too am hopeful for the rest of the year although we still have
the pandemic in second wave and no vaccine yet. A new administration and
perhaps a new senate means any recovery must come from the consumers and
businesses. Upcoming growth will change many things from what sectors flourish
and which will bite the dust, to will the bond yield stay at zero, or negative
or rise sharply. We just don’t know.
Companies that have good steady income like
utilities, telecom, pipelines and banks rarely cut their dividends which are
quite handsome at this moment. We expected few dividend reductions in the
companies held in our portfolios. This has been the case to date. Even though
markets have been volatile, income from such investments has remained stable. Dividend
paying securities have been clawing back market value against the headwind of
the speculation in the market. We will stay this disciplined course despite the
changing winds of market sentiment.
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