Author: Danny Popescu | July 23, 2020
The S&P500 (broad market) shot back up to January levels in Q2 on the back of central bank stimulus and better than expected unemployment numbers. Finishing the quarter, the S&P 500 (CAD) rose 15.79% and the TSX Composite gained 16.97%. However, behind the market surge triggered by governments and central banks, company valuations (stock prices) are becoming further disconnected from the economy. Prices continue to rise while earnings forecasts for many companies remain unknown. Furthermore, speculation that central banks will continue to support the market has led to “mom & pop” investors speculating in bankrupt or near-bankrupt companies in their self-directed trading accounts.
The Canadian dollar (CAD) appreciated in Q2 on the recovery in markets; oil started to rebound, and investors began to take on more risk. Tensions between oil-producing nations fizzled out as OPEC agreed to the largest production cut in history, driving the oil contract back to more normal levels. While our exposure to oil is limited, we continue to watch as it remains a large portion of the Canadian economy.
The Canadian Universe Bond Index ended the quarter up 5.87%. On May 26th, the Bank of Canada began purchasing corporate bonds to support businesses and to help them continue operations throughout the pandemic. The result of this is lower interest rates in the country. While great for businesses, it is not ideal for investors seeking returns from a lower risk asset class. As such, we continue to have most of our fixed-income allocated to private debt, which is consistently paying around 0.5% to 0.55% per month.
Though markets had a great quarter, the level of uncertainty remains high due to the future impacts of COVID-19. Furthermore, central banks flooding the system with liquidity could prove to be detrimental down the road as it inflates the current value of both stocks and bonds. We continue to hold investments in private debt and private real estate, that provide strong, consistent, risk-adjusted returns while increasing our weight to great companies that can perform well in the current environment. This leaves our firm’s client portfolios well balanced, with the ability to generate wealth in both great markets and markets of uncertainty.
Have a great weekend.
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