“The task is not so much to see what no one has yet seen; but to think what nobody has yet thought, about that which everybody sees.”
– Erwin Schrödinger
Life After 2020 - A Historic Year, to Say the Least
Thank goodness it’s 2021! In a year rocked by COVID-19, wildfires, protests, and a tumultuous US election, we experienced many unprecedented events in 2020, a number of which will certainly be added to the history books. With COVID-19, we saw cases skyrocket to an eye-watering 84.5M, roughly 1% of the world population, with the disease claiming 1.8M lives. The virus led to a steep drop in stock prices as investors anticipated the worst, and while stock markets have since recovered, economies continue to grapple with the pandemic, with some countries experiencing their second, third, and in some cases fourth wave of the virus. This has prompted many governments to reimpose lockdowns, impairing small businesses.
And then there was the 2020 US election. Donald Trump’s challenge of Joe Biden’s victory lasted many weeks after the election, with roughly 50 lawsuits being filed in an attempt to overturn results. The claims of election fraud, while not supported by evidence according to the courts, undermined American faith in the electoral process and even incited a riot on Capitol Hill this January. Five lives were claimed by the event, and many blame the President for recklessly promoting a “march” on Capitol Hill.
Despite the chaos, markets have ended the year at all time highs, likely reflecting investor optimism that we are approaching the proverbial light at the end of the tunnel. Vaccines have been the biggest boon, with Pfizer/BioNTech, Moderna and Oxford all producing COVID-19 vaccines in under a year, shattering the previous vaccine-development record of four years (for mumps). Canada, the U.S., and countries around the world have started immunizing front-line workers and their immunocompromised populations, and with research pointing to strong efficacy, these vaccines could mark the beginning of the end of this pandemic.
Nonetheless, we remain on icy ground. Vaccines won’t likely be available to the broader population until later in the year, and even then, only 58% of Americans say they will get the jab (that record-breaking timeline is a point of concern for many). Small businesses are still struggling, which has led to further stimulus efforts from the Canadian and US governments. Such packages may be necessary to keep the economy afloat, but they spell future belt-tightening. Nevertheless, notwithstanding of all the uncertainty and volatility, here at WDS we will continue to “stick to our knitting” and concentrate on investing in high-quality companies at fair prices in order to capture their long-term growth and return. For now, we remain cautiously optimistic; 2021 may be a bumpy ride yet, but with 2020 in the rear-view mirror, it will likely (and hopefully) be smooth sailing by comparison.
As always, we thank you for your support and continued confidence in WDS.
Stocks were down for the first half of 2020, but continued their momentum upwards into December after bouncing from their March lows. In Canada, the S&P/TSX Composite Index ($TSX) ended the year roughly flat at 17,433, representing a 55.3 per cent recovery from its low in March but only a 2.2 per cent return for the full year (5.6 per cent with dividends). The strong recovery is largely thanks to extensive government intervention, with recent investor enthusiasm tied to the discovery of COVID-19 vaccines in the last quarter of the year.
The top and bottom performing sectors for 2020 were familiar faces despite the year’s circumstance. Energy fell 26.6 per cent (total return) as the global shut down led to a plummet in the demand for crude. Meanwhile, Information Technology continued to dominate, ending the year up 80.7 per cent.
The S&P 500 Index ($SPX), meanwhile, not only recovered, but continued chugging further ahead. For 2020, the index achieved an 18.4 per cent total return. In Canadian dollar terms the return was slightly lower at 16.3 per cent, with stimulus measures from the Federal Reserve leading to inflation concerns for the greenback. International stocks also fared well all things considered; for 2020 the MSCI EAFE Index ($MSEAFE) achieved a total return of 8.3 per cent. In fact, global stocks had their best month ever in November, a surprise given COVID’s impact overseas.
Fixed Income and Interest Rates
Since cutting the policy rate 150 basis points to 0.25 per cent at the onset of the pandemic, the Bank of Canada has held steady, choosing not to explore the negative rates applied by Japan and several European countries. Rates are likely to remain low until shaky borrowers (small businesses and consumers) gain solid footing, since higher rates would likely lead to a spike in loan delinquencies. Namely, Canadians have a higher homeownership rate (70%) than our southern neighbour (65%), which presents a higher liability. Ironically, the low rates intended to prevent Canadians from defaulting on their mortgage payments have led many to take advantage of sub 2% mortgages; in November the MLS Home Price Index for Canada was up 11.6% year over year. It will take some time yet to wean the economy off its low rates.
The FTSE TMX Canada Universe Bond Composite Index meanwhile rose 8.7 per cent in 2020 on the back of the rock bottom rates. While representing a solid return for bonds, there is little room left for rates to fall further, which may limit future upside. Skittish investors may, however, continue buying in.
In the US, the Federal Reserve similarly held its Federal Funds Rate after its own 150 basis point cut in March, with the target rate range currently sitting at 0.00 – 0.25 per cent. This effort to re-energize the economy is being amplified by federal intervention, and with the Democratic party now controlling the senate, it is likely we’ll see more stimulus support for businesses and households. This has led to a normalizing of the US yield curve, which is steeper than it has been in the past two years.
The Canadian dollar had an unusually volatile year. In the first half, the loonie’s exchange rate ($CDW) dropped as COVID-19 threatened exports, with the Canadian dollar falling below $0.70 USD in March. In the latter half of 2020, however, the dollar extended its recovery and actually appreciated 2.0 per cent for the year, reaching $0.79 USD by January 1st. Part of the recovery is likely tied to concerns around the US dollar, with some economists believing stimulus measures will translate into a decline in the greenback’s value due to higher inflation.
There are some domestic reasons for the recovery, however. In November, Statistics Canada reported that the country’s merchandise trade deficit had fallen to $3.3 billion, while total exports had reached $46.8 billion, just $1.5 billion short of Canada’s pre-pandemic exports. While it’s encouraging that we have made up most of our lost ground, our recovery has been slowing down; November’s exports were up just 0.5 per cent compared to the 2.2 per cent growth seen in October. Consumer confidence within Canada remains high however, and imports have already surpassed pre-pandemic levels.
As the charts for oil ($WTIC) and gold ($GOLD) demonstrate, the two commodities often find themselves at opposite ends of the return spectrum.
Oil plummeted as the pandemic led investors to flee from the cyclical commodity, however the commodity has been making a slow-and-steady recover. After falling below $12 a barrel in March, WTI ended 2020 at $48.52 a barrel, down 20.5 per cent for the year. While still out of favour, the release of vaccines and improving international trade have been supporting the commodity as it tries to regain lost ground.
Gold ($GOLD) meanwhile upheld its reputation as a safe haven asset. While the asset interestingly fell at the pandemic’s onset, it quickly recovered and saw strong price appreciation, with concerned investors pushing the precious metal to an all-time high of $2,074.88 in August. Since then however, it appears improving sentiment has brought the commodity lower, with gold finishing the year at $1897.77, achieving a still-impressive annual return of 24.8 per cent. Inflation concerns may continue to buoy the metal, with many investors seeing gold as a hedge against the depreciation of the US dollar.
This report is provided for your information. Conclusions and opinions given do not guarantee future events or performance. Facts and data provided are from sources we believe to be reliable, but we cannot guarantee they are complete or accurate. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any securities. Before making an investment or adopting an investment strategy, each investor should review his investment objectives with their investment advisor. Watson Di Primio Steel (WDS) Investment Management Ltd. and individuals and companies who are related may, at any time, buy or sell securities that are hereby described in this report.