Markets continued their ascent through the month of July shrugging off the worries that exist during an ongoing pandemic. Central banks were able to take a back seat throughout the month and monitor the status of their re-opening plans. While the financial market rally is encouraging, we do expect volatility on the path forward and we expect investors who maintain discipline to be rewarded on the way down this long-term path.
Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index based on end-of-day data for the Total Return Index as at market close 05 August 2020 for FTSE Global Indicies and 31 July 2020 for Barclays Global Aggregate Canadian Float Adjusted Bond Index.
US GDP data for the second quarter showed a contraction of almost 33% annualized compared to the previous quarter. The markets were able to digest this information without much trouble as investors were expecting the decline. Investors are focused on future profitability and looking at data such as retail sales, which are hovering within 1% of their pre-lockdown levels. This is a positive as the consumer is a key driver of economic activity in the US. We would expect the GDP data to improve as the trend in daily new cases of COVID declines.
Second quarter earnings season is underway and so far, the results being reported are slightly better than expected. This has certainly contributed to the positive performance we have seen during July. If regions can continue their gradual re-openings without significant interruptions, we can expect the data to continue to improve.
We noted in our previous update that the US had experienced an increase in daily new cases since around mid-June. Unfortunately, this trend continued throughout the month, showing that the US still has a lot of work to do in order to “flatten the curve”. As a result, states have had to roll back their reopening plans, presenting a real challenge if more states were to follow suit. A vaccine would be a strong catalyst to push past these headwinds and support a sustained recovery.
Geopolitical tensions made their way back into headlines during July. Disputes over territory in the south China sea are a source of uncertainty, and of course tensions between the US and China remain ever-present, not to mention the relationship between Canada and China remains rocky due to the arrest of a Huawei executive last year.
Another source of uncertainty is the fast-approaching US presidential election on November 3rd, 2020. Current polling has Joe Biden in the lead. However, we are still a few months out and could experience volatility as we make our way through the news cycle.
As markets continue their rally closer to pre-COVID levels it is natural for investors to worry. It is important to remember that the stock market is not the economy. Financial markets are a pricing machine that are not concerned with what happened yesterday, and instead are constantly evaluating information about the future.
If you have any concerns, it is always important to re-evaluate your goals and ask yourself if anything has changed. If your goals have not changed, stick to your plan and remember that over the long-term markets have an upward bias.