Imagine yourself at the beginning of the year, knowing an uncurable, easily transmitted and deadly virus will emerge that will shut down business, travel, even sporting events. Your daily routines will be altered, millions around the world will be working at home or lose their jobs.

This will turn into a health and economic crisis that no one alive has ever experienced.

I know, you’ve seen that movie before, but now it’s the reality of 2020.

If you knew, would you have swiftly sold off your portfolio before the global economy went into hibernation?

Consistently picking the peaks and valleys of the stock market, or even something close is an impossible endeavor. When do you jump back in to get your plan back on track? For many, it’s difficult to pull the trigger and go back into investments when the news is bleak, and there’s no light at the end of a dark tunnel.

The swift sell-off in stocks is in the record books. It was violent but short-lived.

As the US economy was on the precipice of its worst quarterly decline on record, the major market indexes touched bottom in late March and began a remarkable rally that few thought possible.

While the Dow has yet to eclipse its prior high, the S&P 500 Index set a new record on August 18 and proceeded to set six new closing highs by the end of August. While strong technology performance has fueled a spectacular advance this year in the Nasdaq.

In September, the S&P 500 has pulled back almost 10% since the start of the month.  This pullback should not come as a surprise in the context of the robust recovery we have seen since March combined with the increase in COVID cases and political uncertainty this month.  At its peak on September 2, the S&P 500 was up 7% since January 1st and up 62% from its March 23rd low.  Markets overshoot on the way down and on the way up, and since 1920, the S&P 500 has averaged a 10% pullback every 16 months.

Table 1: Key Index Returns (to Sept 24)

YTD%
Nasdaq Composite 18.9%
S&P 500 Index 0.5%
S&P/TSX composite Index -6.8%

The pandemic changed the rules. There’s no playbook to model outcomes. Aided by unprecedented amounts of fiscal and monetary stimulus, price action in the market since late March accurately called the bounce in economic activity that began in May and has continued into August.

And while the economy is in recovery mode, it has been very uneven. We’re seeing a strong stock market, rock bottom interest rates, and an improvement in the overall economy. Housing activity, a traditional leading economic indicator, has surged. Retail sales, as measured by the U.S. Census, have surpassed pre-COVID levels. Thank pent-up demand, generous jobless benefits, and stimulus checks.

Blemishes remain on the economic landscape

It has been an uneven recovery. While companies have been recalling furloughed workers, total employment remains well below the pre-COVID peak. For example, the U.S economy has yet to reclaim even half of the 22.1 million jobs lost in just March and April.

Meanwhile, the economy may need another shot of fiscal stimulus, but US lawmakers are at an impasse.

A liquidity crisis was avoided when the Fed flooded the financial system with cash, but economic output remains subpar, and potential solvency issues among homeowners and businesses may create new hurdles down the road.

Final thoughts

I remain positive on the long-term prospects for the global economy, but I am monitoring short-term risks.

The mid-summer spike in cases has subsided but is a second wave coming in the fall or winter amid the reopening of schools, and workers going to the office? What if the massive effort to develop a vaccine comes up short? We’ve already seen an increase in cases in BC in the past weeks (BCCDC). With the US election on the horizon and tensions between the U.S/Europe and China, the future is always uncertain and not easy to predict.

While markets don’t always get it right, they attempt to price in the future. Current price action suggests the economy will continue to improve, though the pace of improvement is uncertain.

I am here for you. If you have any thoughts, questions, or concerns, feel free to reach out.

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