TORONTO – It is often said that we are ‘all in the same boat’ since the COVID-19 pandemic arrived last March, but the huge gap between grim economic data and soaring stock valuations suggests that some Canadians are doing much better than others.
Financially, a large part of the population is spared the crisis or is even in better shape. The housing market is strong and those who are able to work remotely have amassed mountains of money. In particular, they devote these savings to investments that boost the market.
Meanwhile, the containment measures have caused major disruption for workers in the service sector and other sectors who have been forced to rely on government assistance.
“All the jobs that have been lost in the country since the start of the crisis – not some, all – were in low-paying sectors and affected low-paying jobs,” said Benjamin Tal, deputy chief economist at CIBC.
North American equity markets have been having a good time since March, setting new records on an almost daily basis, even as COVID-19 hit the economy and tarnished employment data.
Some stock valuations have soared as markets recovered from the correction caused by the pandemic in March.
Tesla shares have jumped about 1,160% in the past year, while Shopify shares have risen 425% and make the Ottawa company Canada’s largest stock market valuation.
The Toronto Stock Exchange’s S & P / TSX Composite Index is up 65% from the lows of last March and is posting growth of 6.5% since the start of February. The rebound was even more marked in the United States, with a gain of 73% for the Dow Jones average, a gain of 79.5% for the broad S&P 500 index and a gain of around 113% for the composite index of Nasdaq, with a strong technological component.
Yet unemployment remains stubbornly high. Canada’s unemployment rate hit 9.6% in January, as 212,800 jobs disappeared.
An asymmetric recession
The disconnect between the financial districts of Bay Street and Wall Street and Mr. and Mrs. Everybody is not new, but it has deepened during the “most asymmetrical recession” in Canadian history, observes Benjamin Tal.
Retail investors with healthy cash balances increased market volumes and contributed to frantic buying that propelled stocks like GameStop and BlackBerry.
TMX Group, which operates the Toronto Stock Exchange, noted that, against a backdrop of increasing volumes, the proportion of retail transactions peaked at 45% of total transaction volume in January, compared to an average of just 35 % one year earlier.
“The factors underlying the strength of retail brokerage are drivers that will continue for some time,” TMX CEO John McKenzie recently told analysts on a conference call. to discuss the group’s financial results.
He emphasized the low interest rate environment that supports market valuations, the prevailing telecommuting culture and the continued growth of retail brokerage applications.
A historic bubble?
Famous investor Jeremy Grantham, who predicted some of the bubbles of the past, now says that the bull market that started in 2009 has “matured into an epic bubble in its own right” with “extreme overvaluation, explosive price increases, frenzied issues and speculative behavior of investors 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, that of 1929 and that of 2000,” he wrote in a comment posted on his company’s website.
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“These big bubbles are where fortunes are made and lost – and where investors really show the measure of their courage.”
While some stocks are overheated and threatening to explode, Mr Tal does not believe this will happen across the market,
“I think we have to clearly distinguish between the speculative pockets that everyone is talking about and the market in general,” he said.
“Of course, there are always risks that (the market) will be drawn into it, but at this point it doesn’t seem like a reasonable scenario.”
Massive fiscal and monetary stimulus are supporting markets, observers say, unless corporate profits collapse and central banks tighten policies.
Still, US Federal Reserve Chairman Jerome Powell signaled this week that the central bank will remain accommodating until employment recovers fully.
Relief after GameStop
Erik Bregar, head of foreign exchange strategy at the Exchange Bank of Canada, believed the story’s frenzy with GameStop and the Reddit forums could wipe out some speculative excess from the market.
“But as soon as these stocks collapsed, everyone sighed with relief and once again pushed the market up,” he said in an interview.
“This stuff is difficult to eliminate. I think it’s possible to basically argue that (the market) shouldn’t be that high, but it hasn’t paid off to bet against that yet. ”
He added that there was just too much positive news, and widely held expectations that the global economy would be strong in the second half of the year, as the COVID-19 vaccination progresses.
“I continue to believe that stocks will represent good value as we move forward here through 2021,” said Mike Archibald, vice president and portfolio manager at AGF Investments.
According to him, unlimited liquidity and people who invest their saved extra money in the stock market are the main growth engines of the market.
In fact, the savings rate and cash deposits have increased by more than 10% in the past two quarters, the highest level on record, said Brian Belski, chief investment strategist at BMO Capital Markets. .
“Yes, valuations seem stretched at first glance, but they also need to be seen against the backdrop of historically low interest rates and low inflation, ingredients that are expected to persist through 2021 and beyond, to our opinion, ”he wrote in a report.
“Seen in this light, we believe that it is not unreasonable that the stock market valuation is maintained (or even slightly increased) compared to its current level.”
Long-term positive outlook
Some areas of the market, including cannabis stocks, cryptocurrency and parts of the tech industry are “frivolous,” but other investments remain attractive, Archibald said.
“Overall, if you look at what I would call strong companies, pillars (…), these stocks still seem reasonably priced to me and I still think there is good upside potential for a number of these companies. ”
It is natural and healthy for the markets to take a break after heavy runs. Stock markets look to the future and anticipate 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 extremely promising,” said Candice Bangsund, portfolio manager for Fiera Capital.
A short-term correction of 5% to 10% is possible and should be seen as a buying opportunity, but massive spending puts a floor under any downward movement, she said.
Also, we won’t know whether we’re in a sustained recovery or a speculative bubble “until it’s in the rearview mirror,” said Kristina Hooper, chief global market strategist at Invesco, in a note.
“And that doesn’t really matter to long-term investors. The reality is that market rebounds and corrections are happening, but the trendline for long-term stocks is up. ”
Ross Marowits, The Canadian Press