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

Smart Money

January 15, 2021

A Trillion Here, A Trillion There

Fourth Quarter 2020 Newsletter

Declining US Dollar Lifts Risk Assets – The fourth quarter of 2020 may be an after thought for most people, but it produced gains that lifted indices back into positive territory and some to record highs. While government support and Central Bank stimulus started the recovery, the US dollar’s decline provided further support for a risk asset rally. A lower US dollar is a reprieve for ...

Declining US Dollar Lifts Risk Assets – The fourth quarter of 2020 may be an after thought for most people, but it produced gains that lifted indices back into positive territory and some to record highs. While government support and Central Bank stimulus started the recovery, the US dollar’s decline provided further support for a risk asset rally. A lower US dollar is a reprieve for global markets as much of the world’s debt is denominated in greenbacks as well as most global trade. The lower US dollar is particularly beneficial for Emerging Markets, but the S&P 500 also gains because most of the constituents are multi-national firms.

Similar to the fourth quarter of 2019, the US Treasury Yield Curve steepened in the fourth quarter. This time however it was from a much lower base as the 10-year Treasury yield ended the year at 0.96% versus 1.92% a year early. Still, the positive momentum from mid-year lows appears poised to carry into 2021.

Trillion Here, A Trillion There – On 25-Mar-20, the US Senate passed the $2.2 trillion CARES Act, a stimulus package designed to speed up financial relief across the United States. Many developed markets followed suit; Canada rolled out an $82 billion economic stimulus package. However, the size and breadth of the relief package was a surprise, especially coming from a largely liberal and capitalistic society. Government spending for economic relief due to the COVID-19 pandemic has rivalled that of war time spending. The packages were not without reason, as financial aid was required for individuals whose ability to produce income was lost. But the consequences of this stimulus, both good and bad, are likely to play out through 2021.

Nearly $1 trillion of the capital was set aside for small businesses that were impacted by the virus lockdowns. While this helped to pay the bills, much of the capital was a loan and only “kicked the can down the road”. Similarly, forbearance programs for mortgages and student loan forgiveness continue to receive this same delay tactic that eventually will come home to roost. For now, the leniency on rents, mortgages and other loans will continue to support risk assets.

In late December, lawmakers passed a $900 billion pandemic relief bill, just before several of the CARES Act aid programs were set to expire. The bill was highlighted by direct stimulus payments of $600, half the amount provided by the first round of cheques. After firmly taking control of Congress, it did not take long for Joe Biden and the Democrats to pump money into the economy and to increase spending to contain the coronavirus pandemic. The American Rescue Plan, announced on 14-Jan-21, is valued at $1.9 trillion and it includes more direct payment to households, a $15 per hour minimum wage and an expansion of jobless benefits.

When the Economic Impact Payment stimulus cheques were sent in spring 2020, apparently 36% of recipients used it for savings and investing. It is anticipated that much of the recent government income will find its way into brokerage accounts again. Therefore, the influence of retail traders should remain a theme for 2021. Adding this to the current market structure which encompasses high valuations and a market dominated by passive investing means that volatility will remain high. The passive management effect causes equities to trade as though they are a lot less liquid. In turn, movements to the upside or downside will be amplified.

Two of our long-term equity themes are materializing. First, cannabis stocks are soaring as the Democrats are poised to follow through on inter-state legalization. Second, commodities are reaping the benefits from a lower US dollar and the additional stimulus will likely pressure the greenback further. However, we remain cognizant of the “dollar smile” theory (the currency increases when the economy is very strong or very weak) and we will adjust exposure accordingly.

Global economic data is poised for a rebound in the first half of 2021. With interest rates climbing, our short-duration call is once again protecting our portfolios. We expect rates to gradually rise although, but volatility will be rampant when at extremes. Should rates collapse again we turn to both gold and alternative investments for support as we are not mandated to hold negative yielding securities. Rest assured that we will remain nimble during volatile markets.

Trillion Here, A Trillion There

December 31, 2020

WJHC ALL-STARS STRIKE NHL GOLD

Smart Money

Each December, the hockey world shifts its attention to the World Junior Hockey Championships. The tournament provides an opportunity for viewers to catch a glimpse of tomorrow’s NHL superstars. But, how successful do the junior hockey superstars become at the highest professional level? Click the link below to see the career earnings of some of the past World Junior All-Stars.

Career Earnings For WJHC All-Stars

December 22, 2020

Stocks Are Stronger As Scary Year Shuts Down

Market Recap & Boxscore

The S&P 500, TSX and MSCI Indices rose 1.3%, 1.0%, 1.0%, respectively, for the period ending 23-Dec-20. Throughout the year we have become accustomed to seeing technology move opposite to energy and financials. In December, these three categories were the sector leaders; tech (+7.8%), energy (+6.1%) and financials (+5.2%). The laggards were interest rate sensitive industries like ...

The S&P 500, TSX and MSCI Indices rose 1.3%, 1.0%, 1.0%, respectively, for the period ending 23-Dec-20. Throughout the year we have become accustomed to seeing technology move opposite to energy and financials. In December, these three categories were the sector leaders; tech (+7.8%), energy (+6.1%) and financials (+5.2%). The laggards were interest rate sensitive industries like utilities and real estate as longer-term rates continued to rise.

The move in energy stocks was driven by sustained strength in oil. WTI rose 3.4%, bringing its two-month leap to 27.9% from its low in early November. We are also witnessing similar albeit more muted moves across the commodity space, likely driven by uninterupted weakness in the US dollar. The DXY once again fell 2% during the period. However, a reversal in the greenback was gaining traction as Christmas day approached. After Congress announced a Covid relief bill that underwhelmed, the outgoing President Trump announced his intention to veto the bill unless the amount of support to citizens increased to $2,000 from the original $600.

The climb in the US 10-year yield carried on throughout the month, gaining 8.3bps to 0.925%. While it is still a full 1% below the rate from one year earlier, the sustained increase over the past five months is noteworthy. Upward momentum is a derivative of future growth expectations or inflationary forces, or a combination of the two. The US Core CPI inflation rate hit 1.6% in December. The Core rate excludes things like food and energy which are typically more volatile. Nevertheless, while energy is excluded, it is a core input for the majority of goods feeding the inflation rate. As such, as we enter 2021, the year-over-year comparisons for oil prices may become increasingly supportive of inflation. Further, strength in key inflation-linked commodities like copper suggest that inflation may exceed the market’s expectations. Copper prices reached a 7-year-high during the period. Gold prices are supportive of this inflation thesis. Nominal rates rose but real rates (nominal minus inflation breakeven rate) have resumed their downward trend. Gold’s correlation with real rates held true as it rose 4.6%. The real interest rate of -1.08% as of 22-Dec-20 is still a considerable distance from the -5.86% level reached in May 1980.

We are still alarmed by the eye-popping volume of IPO transactions in the back half of 2020. As the chart below shows, the 407 transactions completed to date in 2020, combined with 13 yet to come to close the year, will be the largest transaction year on-record since 1999, and 53% higher than the next highest year since the tech boom. The IPO stampede has been accompanied by the explosion of Special Purpose Acquisition Company (SPAC) – 246 new SPACs were created this year, compared to 59 in 2019, the next highest year. In a SPAC, a sponsor, typically an operator or investor well-known to the public, will raise funds in the form of cash with the intention to purchase a company to take them public at some later date. Some high-profile companies which have been taken public via this avenue have been OpenDoor, DraftKings, and Virgin Galactic.

Up until 2020 companies largely decided to remain private due to the inherent advantages in the private ecosystem, so the massive uptick raises many questions. As of 11-Dec-20, PWC reports that on aggregate IPOs have performed an average of 76% in 2020 vs. 13% for the S&P 500. Certainly, investor demand to chase returns has been strong. Further, debt markets have raised a combined $2.5 trillion in 2020, compared to an average of $1.9 trillion from 2016-2019. Included in that are high yield bonds which gathered more than $400 billion – setting a fresh record despite the global pandemic. There a collection of elements that spurred this activity, undoubtedly the trillions of dollars of liquidity injected into the market to help stem the pandemic is a factor.

Looking forward to 2021, the consensus believes the vaccine will provide a boost to economic activity and extend gains in capital markets. However, given the liquidity and stimulus that propped prices in 2020, we wonder if the current calendar year already borrowed much of the gains from 2021.

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Gavin Hockey Wealth Specialists
Air Canada Centre, 50 Bay Street, Suite 1444, Toronto M5J 3A5
416-861-1998