When stock markets are disconnected

(TORONTO) We’ve often been said to be “ all in the same boat ” since the COVID-19 pandemic arrived last March, but the huge gap between bleak economic data and rising equity assessments suggests that some Canadians are doing a lot better than others.


Ross Marwitz
The Canadian Press

Financially, a large portion of the population has survived the crisis or is even better off. The housing market is strong and those able to work remotely have made huge amounts of money. In particular, they allocate these savings to market-enhancing investments.

Major disturbances

Meanwhile, the containment measures have caused significant disruption to workers in the services and other sectors who have had to rely on government aid.

All the jobs lost in the country since the start of the crisis – not some of them, all of them – were in low-paying sectors and went into low-paying jobs.

Benjamin Tall, Deputy Chief Economist, CIBC

North American stock markets have been having a good time since March, setting new records on an almost daily basis, even as COVID-19 strikes the economy and distorts employment data.

Some equity valuations rose as markets recovered from the correction caused by the epidemic in March.

Tesla shares jumped nearly 1,160% in the last year, while Shopify’s shares are up 425% and have made Ottawa the largest valuation of Canada’s stock market.

The S & P / TSX Composite Index on the Toronto Stock Exchange is up 65% from its lowest level in March and is registering 6.5% growth since the start of February. The recovery was most pronounced in the US, with gains of 73% for the Dow Jones, gains of 79.5% for the broad S&P 500 index, and gains of nearly 113% for the Nasdaq composite index, with a strong technology component rallying.

Even so, unemployment rates remain stubbornly high. Canada’s unemployment rate was 9.6% in January, with 212,800 jobs missing.

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Asymmetric stagnation

The disconnect between the financial districts of Bay Street and Wall Street and Mrs and Mrs Everyone is not new, but it has deepened during the “most contrasting recession” in Canadian history, as Benjamin Tall notes.

Retail investors with good cash balances increased market volumes and contributed to the frantic buying that drove stocks like GameStop and BlackBerry.

TMX Group, which runs the Toronto Stock Exchange, notes that against a backdrop of increased volume, the proportion of retail transactions peaked at 45% of total transaction volume in January, compared to an average of just 35% a year earlier.

“The factors behind the strength of retail brokerage are the drivers that will last for some time,” TMX CEO John MacKenzie recently told analysts on a conference call to discuss the group’s financial results.

He emphasized the low interest rate environment that supports market assessments, the prevalent telecommuting culture and the continued growth of retail brokerage applications.

Historic bubble?

Celebrated investor Jeremy Grantham, who has predicted some bubbles of the past, now says the bull market that started in 2009 “matured into an epic bubble in itself” with “extreme overvaluation, massive price increases, frantic issuance and speculative investor behavior at a hysterical level.” . ”

I think this event will be remembered as one of the great bubbles in financial history, with the South Sea bubble, which occurred in 1929 and 2000.

Investor Jeremy Grantham who predicted some bubbles in the past

“These big bubbles are where you make the fortunes and lose – and where investors really show their bravery,” he wrote in a comment posted on his company’s website.

While some stocks are overheating and threaten to explode, Tal doesn’t think this will happen across the market.

“I think we have to clearly distinguish between the pockets of speculation that everyone is talking about and the market in general,” he said.

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“Of course, there is always a risk that (the market) will be attracted to it, but at this point it doesn’t seem like a reasonable scenario.”

Observers say that the huge fiscal and monetary stimulus supports the markets, unless corporate profits collapse and central banks tighten their policies.

This week, however, US Federal Reserve Chairman Jerome Powell indicated that the central bank will remain accommodative until employment fully recovers.

Relief after GameStop

Eric Priegar, head of foreign exchange strategy at Exchange Bank of Canada, thinks the story craze with GameStop and Reddit forums could wipe out some of the excess speculation from the market.

“But once these stocks collapsed, everyone sighed in relief and pushed the market up again,” he said in an interview.

These things are difficult to eliminate. I think it can be basically said that (the market) shouldn’t be that high, but betting on that hasn’t paid off yet.

Eric Priegar, Head of Foreign Exchange Strategy at the Canadian Exchange Bank

He added that there has been a lot of positive news, and there is a widespread expectation that the global economy will be strong in the second half of the year, as COVID-19 vaccination progresses.

“I still believe stocks will be good value as we go forward here until 2021,” said Mike Archibald, Vice President and Portfolio Manager at AGF Investments.

According to him, unlimited liquidity and people who invest their additional saved money in the stock market are the main growth drivers of the market.

In fact, the savings and cash deposit rate has increased by more than 10% in the past two quarters, the highest level ever, said Brian Bielsky, chief investment analyst at BMO Capital Markets.

“From this angle, we believe that it is not unreasonable to maintain the stock market valuation (even a slight increase) compared to its current level.” He adds in a recent report

Positive long-term outlook

Archibald said some areas of the market, including hemp stocks, cryptocurrencies and parts of the tech industry, were “trivial”, but that other investments remained attractive.

In general, if you look at what I would call strong companies, pillars […]These stocks still look affordable to me and I still think there is a good possibility to increase the number of these companies.

Mike Archibald, Vice President and Portfolio Manager at AGF Investments

It’s normal and healthy for the markets to take a breather after a heavy jog. Stock markets are looking to the future and anticipating how things will turn out in the future, not where they are now.

“If you can look beyond the next few months, the outlook is very bright,” said Candace Bangsund, portfolio manager of Vieira Capital.

It said a short-term correction of 5% to 10% is possible and should be viewed as a buying opportunity, but massive spending is laying ground under any downward move.

Also, we won’t know if we are in a sustainable recovery or a speculative bubble “until you are in the rearview mirror”, Christina Huber, Invesco’s chief global market strategist, said in a note.

And that doesn’t really matter to long-term investors. The truth is, the market is making retracements and corrections, but the trend line for long-term stocks is rising. ”

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