Smart Money

Our regular summary of the capital markets. Check back each month for new updates.

Smart Money

October 01, 2020

Election Outlook Obscures The Prospects for 4Q20

Third Quarter 2020 Newsletter

Bond Yields Firm As Domestic Equities Rally – Global equities gained in the third quarter but performance was uneven among geographic regions. Aggressive monetary and fiscal stimulus measures helped asset prices in the United States while lockdowns in Asia neutralized COVID-19 and fueled markets. As fiscal stimulus measures ran their course and children returned to school in September...

Bond Yields Firm As Domestic Equities Rally – Global equities gained in the third quarter but performance was uneven among geographic regions. Aggressive monetary and fiscal stimulus measures helped asset prices in the United States while lockdowns in Asia neutralized COVID-19 and fueled markets.

As fiscal stimulus measures ran their course and children returned to school in September risk appetites slipped. U.S. markets fell 4%-6% during the month but are equivalently within all-time highs. European equities were flat-to-down as exposure to underperforming financial and energy sectors prevented gains. Despite heavy weights to similar sectors, the Canadian S&P/TSX Composite advanced nearly 5% as metals, mining and other commodity related equities surged.

Most commodities received a bid as the U.S. dollar fell against major currencies (excluding the Yen). Lumber attracted most of the limelight as it broke through previous highs, topping out at $1,000 before finishing the quarter at $612, gaining 41%. Oil prices were the first commodity to falter, ending the quarter flat after peaking at the end of August.
Gold drifted higher but came under pressure as bond yields began to firm and the U.S. dollar found a temporary bottom. Higher bond yields without inflation will limit gold’s upside and likely upset equity valuations.


The Implications of Elections – Conventional wisdom says that uncertainty is bad for markets. Intuitively this makes sense since confidence in an outcome, or at the very least a stable outlook, should lead to more investment decisions today. With the U.S. election (03-Nov-20) just around the corner equity markets have started pricing in the risk of political instability. This is most evident in the VIX (Volatility) Index, which has anticipated a period of uncertainty in the fourth quarter since the market decline in March. This marked a turning point for expectations about the election’s outcome. President Trump could no longer use the stock market as the gauge for his success during the Coronavirus Crash.

Despite the stock market recovery, the mishandling of the outbreak has cast the Democrats into a healthy lead. Forecasts are now suggesting a Blue Wave will give Joe Biden the presidency and both houses of Congress to the Democrats. A “sweep” may unsettle the market because of the absence of the checks and balances that demand negotiation and compromise, which pulls either wing toward the centre. Instead swift, self-serving decisions may present themselves over important rulings such as the current anti-trust recommendations for big-technology firms. The Democratically controlled House of Representatives just released a massive overhaul that would have major consequences for the largest publicly traded companies, Amazon and Apple. This type of change could be a major catalyst that causes a change in market leaders as we highlighted in our October 2019 newsletter.

Nevertheless, declaring a loss for Trump and the Republicans is still premature. The possibility remains that the gap can be overcome, or it can be tightened enough to contest the election results. A contested election could arise from a simple delay in counting of mail-in ballots or a more serious scenario such as voter fraud. The U.S. presidential election in 2000 was contested when close results in Florida led to a vote recount by hand. The recount ended up in the 9-person Supreme Court. While a delay similar the Bush-Gore controversy may disrupt markets in the short-term, more worrying are the results of a recent Hofstra University survey. This survey showed a significant rise in the number of Americans, both Democrats and Republicans, who feel it is justified for their party to use violence to advance political goals.

While election outcomes and legislation can have adverse impacts on specific cohorts of markets, in general equity markets typically prosper regardless of the political party in office. Studying historical returns, if you exclude the most recent 16 years, the correlation between presidential party and stock market returns is non-existent. The Great Financial Crisis and subsequent rebound sway the results slightly in favour of the Democrats. However, most evident is that returns have more to do with the business cycle than presidents.

Our tactical decision-making process is more aligned with the business cycle than election outcomes. These maneuvers are smaller in nature to strategic allocation decisions, which align with client risk tolerances, but these are never single point decisions. Factors such as valuation, fundamentals and technical indicators are also incorporated into investment decisions. Take big-technology firms, we view the proposed anti-trust investigation combined with valuations as a major concern but are respecting the strong fundamentals and technical price charts.

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September 30, 2020

Welcome to the NHL

Smart Money

With the conclusion of the 2020 Stanley Cup Playoffs, all eyes in the hockey world will now shift to the upcoming NHL Entry Draft. Over the course of two days (October 6th and 7th), 210 young men will be selected to join 30 NHL franchises. In addition to joining a new team, these young players will find a new home. Click the link below to see some interesting facts about the cities se...

With the conclusion of the 2020 Stanley Cup Playoffs, all eyes in the hockey world will now shift to the upcoming NHL Entry Draft. Over the course of two days (October 6th and 7th), 210 young men will be selected to join 30 NHL franchises. In addition to joining a new team, these young players will find a new home. Click the link below to see some interesting facts about the cities selecting in the top 10 of next month’s draft

Getting To Know Your New Home

September 28, 2020

September Slump Sets Stage for the Election & Fourth Quarter

Market Recap & Boxscore

After five consecutive months of gains across US and Canadian indices, the brakes were firmly applied to the rally. The S&P 500 fell 5.2% for the period with losses led by Financials and Technology. The MSCI World and TSX Indices provided little refuge, down 4.7% and 3.7%, respectively. Notably, when the S&P 500 and Nasdaq 100 scaled new peaks in August, their respective measu...

After five consecutive months of gains across US and Canadian indices, the brakes were firmly applied to the rally. The S&P 500 fell 5.2% for the period with losses led by Financials and Technology. The MSCI World and TSX Indices provided little refuge, down 4.7% and 3.7%, respectively. Notably, when the S&P 500 and Nasdaq 100 scaled new peaks in August, their respective measures of implied volatility also rose in tandem. Concurrent increases in equity and volatility gauges are uncommon. Accordingly, the September slump was not alarming. The US presidential election date is fast approaching, and volatility is expected to remain elevated.

Gold and silver lost their lustre in September as well, sliding 3.4% and 14.7%, respectively, as the USD strengthened. WTI oil tumbled 6.9% but most of the weakness occurred early in the month, slumping from $43 to below $37 by 08-Sep-20, but recovering to $40.60 at press time. The timing of the rebound coincided with Saudi energy minister’s taunt to oil short sellers. Following the OPEC+ gathering, Prince Abdulaziz bin Salman invoked Dirty Harry, with a “Make My Day” warning directed at those who wished to gamble on declining prices. Elsewhere, bonds remained flat through the back half of September during the more aggressive stage of the equity selloff. Although this is a brief time series, if bond markets are viewed as overpriced and undesirable, it will fail to provide a traditional hedge to equity wreckage.

As the world reserve currency, the USD continues to act as the straw that stirs the financial asset drink. In September, the dollar measured by the DXY, reversed a 6-month downtrend by rising 2.2%, negatively affecting stock prices, credit, gold, silver, and other commodities. Since March, large dollar supply through monetary and fiscal stimulus depressed DXY by over 10%. One consequence of a weak dollar is that it contributes to inflation. However, inflation has been a threat since the Tech Wreck and the Great Financial Crisis because the government responded to these collapses by initiating large-scale stimulus through monetary printing. The thesis was that the increased supply of dollars would flood the economy and cause runaway inflation. However, the monetary stimulus mechanism is simply a route to add reserves to bank balance sheets. If the banks are reluctant to release those reserves to the economy through increased corporate or personal lending, the multiplier effect is unsuccessful. Once again, to counter the economic impact of the pandemic, the U.S. passed several stimulus packages, but banks are tightening lending standards, lowering credit limits and demanding higher minimum credit scores. As result, banks are applying a deflationary force that counteracts the government’s monetary efforts. However, the distinction with this regime’s rescue program is that banks are also being bypassed via direct payments to personal and corporate bank accounts. In August, the US Consumer Price Index (CPI) rose for the third consecutive month. The components that are leading the measure are Used Cars (up 5.4%!), Shelter, Recreation, and Household Furnishings.

Much of the dollar’s surge in September can be attributed to a logjam in Congress related to another round of stimulus spending. Negotiators remain far apart on an overall price tag, and with just over a month before Election Day, the window for striking a deal was slim. However, when an eventual deal is passed, the price tag will be north of $2 trillion, but less than the $3.4 trillion Democratic proposal in May. In any case, it should be sufficient to cap the upside on DXY, allowing for a renewal in commodities and stock prices.