Happy October, hope everyone has found their groove in the return to fall!
I am actually finding this partially reopened economy/society harder to adjust to than when everything was fully closed. We went from a family bubble of about 25 people or so, to well over a thousand very quickly. My wife is a music teacher, so her school “bubble” is 400 students; each one of my kids and my soon to be daughter in law have their own 50 person school bubble; we all play soccer so add another 50 person cohort each, and with that started back up as well as my coaching circle, you can see how quickly those numbers add up! All of this even though COVID numbers are up both globally and locally, as well as Trump himself testing positive just this week. Some businesses are open, some are not. School and sports have started back up, but the kids and I are still at home working virtually. As things are reopening, each business, sport, family, and individual are interpreting already unclear guidelines and direction in completely different ways. Bonnie Henry is telling us to shrink our circles while John Horgan has called for a snap election! The juxtaposition of what is allowed versus what is not doesn’t really make sense to me. I certainly wouldn’t want to be the one setting policy in such a crazy time, but it is a world of mixed messaging that is somewhat disconcerting and hard to find your feet in!
Despite all the uncertainty, September held true to form and reinforced its’ reputation as being the worst returning month for stocks as markets fell back off their highs and ended down somewhere in the 4-5% range. I would consider this a pretty normal part of a market cycle considering we’ve just gone through one of the best 6 month rallies in the history of stocks (albeit fairly narrow in terms of breadth of sectors that ran up). We almost needed a bit of a correction to trim some of the froth off valuations. Resist the temptation to become too negative with this corrective phase playing out as there are plenty of positives with regards to the economic data. Global manufacturing continues to improve month over month and unemployment numbers and home sales in particular surprise on the upside. No sign of countries slowing down fiscal aide with the US closer to passing their latest round of stimulation and Trudeau avowing Canadians that now is not the time for austerity. Still a lot of capital on the sidelines and in alternative assets waiting to be rotated into stocks on market weakness as well.
My daughter took our dog Mikki for a walk the other night with her boyfriend, Joel. Everything seemed normal until Mikki took off full speed around the back of a neighbor’s yard. Maddie and Joel were trying to call her back when all the sudden a massive brown bear came tearing out the other side of the yard with Mikki right on its heels. Maddie took off, the bear passed within a few feet of her and Joel, dog still full on chasing it, then ran into the woods across from the house. At that point Mikki stopped and came trotting back, quite proud of herself for protecting the neighborhood. As Maddie quite dramatically tells the story “I saw my life flash before my eyes, but don’t worry Dad, I knew I was faster than Joel!”.
I am going to stretch an analogy from that story to offer the viewpoint: the current bear market has been chased away under the auspices of unprecedented market stimulus, and optimism that the worst is already behind us and that by next year, COVID will be a thing of the past. The bear market is on the run as the market’s perception of where the economy will continue to defy both the reality of where it is currently, as well as popular opinion. Markets will continue to recover and grow as long as that narrative is unchallenged. The risk is that at any time that bear could remember that it is a bear and does not need to be afraid of a dog, then all the sudden turn around!
One of the major potential disruptors to market harmony is the upcoming US election. I, along with most of the world, watched the first presidential debate in absolute disbelief that this is what US politics has degenerated to. It was like watching a train wreck, whereby as much as you want to look away you can’t help but watch it unfold. A bit depressing that those are the only two choices for leading the most powerful country in the world. Normally, despite the hoopla around them, US election cycles do not have too much impact on markets. We are soon to be inundated on polling data and the likelihood of Democrats or Republicans sweeping the Presidency, House and Senate, and every combination in between. Then there is the analysis of tax and policy changes, the potential impact on business, individuals and markets for each one of the potential scenarios. Markets have been good and bad under every combination. I have read hundreds of pages so far of analysis on the upcoming election possibilities. From a purely economic standpoint, Democrats in office means a rollback on corporate taxes, however, almost certainly comes with a more diplomatic approach to foreign trade. Which way to weigh the importance of either is more a matter of opinion than fact. Policy and taxes have some importance for sure but are a normal part of every election cycle and at this point are already partially factored into markets pricing. What makes this election cycle a bigger risk event than normal is the possibility that neither side is going to be willing to concede the election in November. The potential unrest that comes from a contested election in an already fractured country is the real wildcard. Markets hate uncertainty, and no clear winner in November along with accompanying civil unrest could be a big disrupter although I would still expect (hope!) it to be a temporary problem.
Fourth quarter is historically the most positive time of year for markets, but my guess is the uncertainty around the election will mean volatility is likely to stick with us through until next year. Your portfolios are diversified, anchored in discipline and overweight in longer term secular trends that have nothing to do with who is in office, so no need to be reactionary to election news. We may look to opportunistically add to areas we like over the next quarter if we do see market weakness stemming from short term headlines. We are sure to remember 2020! We are not living in boring times and there is still more to come for this year.
As we wait to see how things unfold, remember to stay positive, stay safe, stay disciplined!
Jeremy
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