Stocks have been on a great run over Q2; US markets posted its best quarterly gain since 1987. While the Canadian market had a solid quarter of its own as well. As markets approach pre-pandemic levels, we can see a recovery is underway. The path forward will have it bumps and, with the uncertainty that currently exists, we can expect volatility to persist.
*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 01 July 2020
Stocks markets rallied sharply over the quarter fueled by extraordinary stimulus efforts by governments and central banks. In the US we have seen an improvement in some economic indicators: consumer sentiment and spending are slowly improving, retail sales are growing, and even employment data which has been hit the hardest as workers have been sent home has started to come in better than expected.
Throughout the month the US House of Representatives passed an unprecedented $1.5 trillion infrastructure bill aimed at improving the nation’s critical infrastructure such as roads and bridges, affordable housing, education, expanding broadband internet access, and some climate-related initiatives. Expansionary fiscal spending is thought to have multiplier effects that ripple their way through the economy and create even more spending, which could add further fuel to a recovery. However, fiscal policy exists in the realm of politics, meaning that issues such as non-bipartisanship can get in the way and lead to time lags or even bills being taken off the table.
Although markets have had a great quarter, plenty of uncertainty remains to balance out the tailwinds. For instance, as states start to re-open, we have seen an uptick in COVID-19 cases in places like Texas, Florida, and Arizona where they have had to dial back their re-opening plans. And, although the search for a vaccine has moved forward at a record pace, the risk of a second wave is very real.
The November presidential election is also starting to come into view. At this time, polling suggests a democratic sweep of the white house and congress is a possibility, but that is still far from certain. This could mean a roll back of corporate tax cuts and an increased regulatory burden for businesses.
Lastly, an interesting development back home was the downgrading of Canada’s credit rating from AAA to AA+ by ratings agency Fitch. This means that their outlook for the Canadian economy has worsened slightly compared to many of our developed nation peers that have maintained their ratings; if Canada needs to access international capital markets to borrow funds, they could see an increased cost of capital. This represents another reason we advocate for portfolio diversification and against home country bias.
Going into the second half of the year we continue to expect elevated volatility. We expect investors who maintain discipline (meaning those who hold a diversified portfolio), have clear pre-defined rebalancing rules to be able to take advantage of price movements and have not taken a seat out on the sidelines, to do well in the long-term.
We view tools such as pre-authorized contributions as a great way to set it and forget it, allowing you to tune out noise and enjoy your family and the summer.