Through our independent research provider, we keep track of the fund volumes that institutional money is flowing into seven different asset classes. These are ranked top to bottom and provide us with an overview of where large investor interest is most active. Current rankings are as follows:

 

1. International Equities

2. U.S. Equities, (up from position #3).

3. Cash (down from position number 2).

4. Currencies.

5. Canadian Equities.

6. Bonds (up from the 7th position).

7. Commodities (down from #6).

 

This “money flow” ranking helps us determine if equities are being accumulated versus other assets. In general, world equity markets look healthy right now in comparison to other asset classes, as International and US stocks are in the top two positions, with Canada at number 5. This general positioning helps explain the equity market rally in the past three months, as there are certain sectors that have bounced back strongly from the lows of the March correction.

 

What is driving this market is the unprecedented amounts of stimulus that governments and Central Banks around the globe have employed to keep their respective economies afloat. The U.S. alone has injected $2 trillion dollars into their economy, which is more stimulus then was added during the Recession of 2008, and the largest fiscal stimulus program we have witnessed since WWII. Both fiscal (Government spending) and monetary policies (lowering interest rates and buying bonds) have been the main catalysts for this market rally. Low yields on high quality government and corporate bonds dissuade investors from buying these types of assets. Equity markets are a beneficiary of historic low yields, as investors seek out dividends to provide cash flow and a return on their funds.

 

Stock market sentiment and valuation issues seem to be stuck in neutral at the moment. Some believe the economic recovery is well underway, employment and consumer demand are making their way back to more “normal” levels, the issues and challenges presented by COVID 19 are getting under control, and a vaccine and more effective treatment options are coming shortly. Others believe that while all this may happen over time, the challenges faced by the economy will take longer to overcome, the health issues presented by the virus are still a big question mark, and it will be a long and bumpy road back to “normal”

We believe markets will continue to be volatile for the foreseeable future and will continue to be swayed by headlines (good and bad) and short term influences. The recovery in economies around the world will likely be slow and uneven, with some sectors (hospitality, transportation, energy, real estate) having to redefine how they do business, with other sectors (technology, online businesses) able to recover faster, and even thrive. Its likely that Canadian and US governments and Central Banks will continue to provide stimulus programs where needed, but this is not a bottomless well of support. Most developed country estimates call for significant GDP declines through 2020, rebounding in 2021 (forecasted 2020 declines of between 4-10 percent for most major economies).

 

Geopolitical tensions that impact markets continue……China removing what few civil liberties remain left in Hong Kong…...the eventual outcome (or not) of a China-U.S. trade deal……Brexit happening in the fall…..the US Presidential election…..

 

And finally, the biggest issue impacting global markets at the moment remains getting some level of control over the virus, so that economies which have started to open up don’t have to close down again, and everyone can focus on recovering and rebuilding what has been lost these last few months. Towards this end, a safe and reliable vaccine, more effective treatment options, and better protection for our most at-risk individuals is of paramount importance. Medical experts are cautioning about the strong likelihood of a “second wave” in the coming flu season, and many believe we aren’t even through the first wave. At this point, no one has a reliable crystal ball on where the virus will take us, and the impact on the economy and on the stock markets. We caution investors not to expect too much too soon, as the impact of the virus in Canada and around the world has been consistently underestimated so far. We are certainly of the opinion that markets are resilient and will bounce back with some consistency at some point in time, but maintaining a element of safety in your own portfolio right now is likely a very good thing.

 

The Reynolds Soble Moore Group