2020 has been a record year for the markets. We've seen the fastest decline in history, followed by the fastest recovery in history. Back in March, the S&P 500 dropped over 20% in 16 trading sessions sending it into bear market territory. Follow that up with 65 trading days later, and the market has gained back 41%, the strongest move off a bear market low in the history of the index. Back in March we touched on what may be expected for the remainder of the year, and in hindsight it looks very similar to what our research had indicated. To read what we mentioned back in March, CLICK HERE.
Currently the S&P 500 is sitting at a gain of 4.75% for the year, with the TSX (Toronto Stock Exchange) and the Dow Jones sitting at a loss of (3.21%) and (1.83%), respectively. (See graph below)
But the market numbers don't tell a complete story - there has been a bifurcation inside the index, with the largest companies generating most of the gains, and the smaller companies lagging behind. Looking at the S&P 500, it has recently hit new all time highs. However, if you look at the S&P 500 equal weight index, you'll notice it's still off 7% below it's all time highs. (The equal weight index includes all the companies in the S&P 500, but keeps each company at a 0.2% weight, re-balancing each quarter.)
The bifurcation inside the markets is driven by a combination of the winners and losers, with the winners being technology companies and the losers being the hospitality, entertainment, and energy sectors. This would be expected during the global lock-down, as people have been forced to limit their interactions with one another. This has caused a major decrease in travel, the use of hotels and resorts, and an overall reduction in the consumption of energy. The trend towards using more and more technology has accelerated as individuals have been forced to find other ways other ways of communicating and doing business together through digital means, therefore increasing the revenues of these companies. (ie. How common was the video platform Zoom before the pandemic?)
The other major winner so far this year has been gold and precious metals companies, albeit for different reasons. We've seen unprecedented amounts of government stimulus, with governments around the world showering money throughout their economies and ballooning their national debt. These increased debt loads have decreased the confidence people have in governments paying back their debt and the purchasing power of their local currency. Investors have started looking towards alternative stores of value such as gold which has been incredibly positive for both gold bullion and precious metals companies so far this year. (See chart below) As expected, you will notice the gold miners index outperforming the price of gold, since they have operating leverage over the gold price.
So, what can we expect from here forward?
Well, our research indicates that equities have the ability to move much higher. The rationale behind this is all relative value, and we'll touch on this in a future newsletter.
Financial Advisor, BASc
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