23 October, 2020

Quarterly Commentary

A look back on Q3 2020


September is often referred to as the cruelest month for stock markets and it played out that way again this year as most equity markets finished in negative territory for the month. In Canada, the S&P/TSX Composite Index was down -2.1% with nine of eleven sectors finishing the month with negative returns.


Despite the downbeat ending, the third quarter – July, August and September – largely saw stock markets continue the remarkable run they’ve been on since the end of March. The TSX was up 4.7% during that timeframe.


The benefits of diversification were on full display in the third quarter, too, as both Asian and U.S. equities outperformed Canada while European equities were a bit of a laggard. China’s extraordinary turnaround from COVID-19 lockdowns has helped fuel strong performance by Asian markets.


In the U.S., growth stocks led by mega-cap technology companies, which benefited from the move to online caused by the pandemic, saw a sell-off in early September, after having enjoyed a good quarter prior to that point. In the fortunate event that a vaccine is approved and widely accessible, we could start to see a rotation to cheaper, value stocks with financials and travel & tourism related companies returning to favour. However, if lockdowns return due to a resurgence in the virus, the run-up by tech stocks and others may continue.


Central banks have done just about everything they can do, affirming that they will keep rates at their current ultra-low levels for at least the next two years, with the U.S. Federal Reserve pegging any future rate increases to achieving targeted inflation and employment numbers – which are likely many years off.


While this ultra-low rate environment may make it seem like bonds won’t have a use in effective portfolio construction in the future; to the contrary, we still see the benefits of fixed income in providing a buffer to equity volatility. We also continue to diversify our fixed income exposure both by credit type and geography to increase returns and diversification without taking on any significant added risks.


Outlook for the months ahead


There are many global events that will bear watching over the coming quarter, including the recovery of President Trump. In the next couple of weeks, we may see the U.S. congress reach a deal on another stimulus package, which will help buoy consumers – who comprise about 70% of the U.S. economy. Good news on a vaccine or a viable COVID-19 treatment would also provide a lift to markets. On the other hand, a contested U.S. election result would add some short-term volatility, as would a no-deal hard ‘Brexit’, which is increasingly looking like a strong possibility.


We believe that effective diversification remains your first and best defense against this highly uncertain environment. Whether it’s by asset class or by region, a properly constructed portfolio can give you the protection you need in down markets and the ability to participate as markets rise. I like to think of this as a “winning by not losing” strategy. In an environment with high levels of uncertainty and high valuations, there is an asymmetric payoff for taking on excessive risk. Although “winning by not losing” is not nearly as appealing to our emotions as a “winning by winning” strategy, it is a better strategy for the long term.


As always, we encourage you to follow a sound financial plan, and to speak with an Advisor to ensure you are on track to meeting your investment objectives.


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