2020 Q2 Market Summary and Outlook
The S&P/TSX Composite Index, S&P 500 Index Total Return and other global equity indices bounced sharply higher from March lows. Throughout April and May, investors shrugged off some of the worst economic data on record, and instead focused on progress toward a medical treatment for COVID-19, numerous economic stimulus packages – both fiscal and monetary – and expectations of a recovery as economies reopened from lockdowns. Moving into June, signs of economic stabilization carried the rally further, despite increasing numbers of coronavirus cases in the U.S. and other countries. A stronger Canadian dollar detracted from returns to Canadian investors from international holdings.
Both the TSX and the S&P 500 have now climbed almost 40% from the lows of the COVID-19 selloff. The large-cap technology and Internet-dominated NASDAQ Composite Index even touched a new record high, briefly topping the 10,000 level for the first time. “Growth” stock indices significantly outperformed “value”stock indices.
The advance of the TSX was led by the technology, consumer discretionary and materials sectors. Technology was the strongest sector, lifted by e-commerce company Shopify Inc. The consumer discretionary sector saw strong performance from some of the companies that had been hardest hit in the first quarter selloff, while the materials sector was strong due to higher gold prices. The technology and consumer discretionary sectors were also especially strong in the S&P 500. The U.S. tech sector continues to be powered higher by mega-cap companies such as Apple Inc. and Microsoft Corp. Similarly, the discretionary sector is narrowly dominated by e-commerce giant Amazon.com Inc., whose share price has jumped almost 50% year-to-date. Energy was among the best performing sectors in the S&P 500, surprising perhaps, given that West Texas Intermediate (WTI) crude futures prices fell in April into negative territory for the first time ever following a dispute between Russia and Saudi Arabia. The Organization of the Petroleum Exporting Countries (OPEC) and other producers then cut production and raised prices, resulting in a rebound in the energy sector globally. But energy underperformed in Canada despite the global rebound because of ongoing challenges including pipeline capacity. Defensive sectors including staples and utilities underperformed in both Canada and the US.
Within both Europe and Asia, markets varied in strength, but at the regional level, Europe tended to outperform Asia. In Europe, Germany’s DAX Index was a top performer, while the IBEX 35 Index in Spain – one of the epicentres of Europe’s coronavirus outbreak – was among the weakest markets. Japan’s Nikkei 225 Index finished the quarter with one of the strongest gains among the EAFE countries, while shares in Hong Kong significantly lagged after China imposed new national security laws on the territory.
Fixed income markets were mostly higher, as global stimulus measures calmed credit market volatility. Central bank support programs drove outperformance of assets classes directly exposed to those programs, such as both investment grade and high yield corporate bonds. Short term interest rates in most countries remained anchored at very low or even negative levels. Both the Bank of Canada and the U.S. Federal Reserve kept their benchmark policy rates steady during the quarter, having slashed those benchmarks to near-zero in March.
The path of COVID-19 infections will likely be the determining factor in the pace of recovery of the economy and earnings. A second wave that impedes economic activity is a significant risk and officials still can’t accurately predict the rate of infections and spread of COVID-19. However, most experts believe that, because the underlying economy was fundamentally strong going into the crisis, a sustained recovery in the second half of 2020 is the most likely outcome, given the extent of the monetary and fiscal policy response directed at reviving growth.