Markets have had a strong start to the year following a recovery in 2020. One year after the emergence of Covid-19, no one could have imagined it would remain such a force in our daily lives. Close to home, both Ontario and Quebec have enforced stricter lockdown measures due to a spring resurgence in Covid-19 cases. Farther abroad, France has enacted a nationwide lockdown and the remainder of continental Europe continues to struggle as well. Given this backdrop, one might ask why such positivity from markets?
Simply put, vaccines are coming with both the UK and the US having gotten a head start. So, while some regions will be slower to “emerge”, the outlook remains positive and the trajectory of the global economy continues to improve. Renewed political stability in the US is also leading to greater business confidence and spending in part due to improved foreign and trade relations.
The world also continues to be awash in cash with both governments and central banks printing and spending money at a furious pace. Much of these funds eventually find their way into investors hands who in turn look to invest the funds at a reasonable rate of return. With interest and bond rates at historically low levels, much of these funds are directed towards the stock market and real estate. This has certainly been one of the reasons for the strong performance of both the stock market and real estate in the midst of a global pandemic.
While many of the stocks that did particularly well last year continue to trade at valuations reminiscent of the Tech Bubble in 2000 (i.e. Shopify, Netflix, Tesla), we have begun to see a rotation out of these companies and into far more reasonably valued companies. We would expect this to continue as we move closer and closer to a more “normal” environment and this will continue to benefit our clients’ portfolios.
Going forward, the major risk we see to the economy and stocks is the potential for inflation and a corresponding rise in interest rates. Bond markets have already indicated that we are heading higher. In the last 3 months, long term rates have doubled (resulting in long term bond values falling roughly 10%) due to the prospects of an improving economy. Central banks have indicated they are unphased by this and will keep the printing presses open. This will support elevated valuations in the short term, but we believe continued stimulus increases the risks of inflation and ultimately higher rates across the board. Considering this risk, we will continue to avoid areas of the market with elevated valuations which have benefitted from this low rate environment and flood of liquidity.
We have seen some irrational behaviour in markets recently driven in part by a retail trading frenzy in stocks such as Gamestop and AMC. SPAC’s (Special Purpose Acquisition Corporations), which are effectively a blank cheque from investors for a potential IPO-like investment, have soared in popularity. This type of risk taking has turned into a fever and is symptomatic of a broader disregard in markets for fundamentals (i.e. actual cash flows, profits etc..). This type of environment never ends well. Those who don’t learn from history are doomed to repeat it. We continue to invest prudently for our clients portfolios to achieve growth but only at what we deem is an acceptable level of risk.
We look forward to speaking with you and wish you and your families good health as the world begins to gradually move forward from the pandemic.
Simply put, vaccines are coming with both the UK and the US having gotten a head start. So, while some regions will be slower to “emerge”, the outlook remains positive and the trajectory of the global economy continues to improve. Renewed political stability in the US is also leading to greater business confidence and spending in part due to improved foreign and trade relations.
The world also continues to be awash in cash with both governments and central banks printing and spending money at a furious pace. Much of these funds eventually find their way into investors hands who in turn look to invest the funds at a reasonable rate of return. With interest and bond rates at historically low levels, much of these funds are directed towards the stock market and real estate. This has certainly been one of the reasons for the strong performance of both the stock market and real estate in the midst of a global pandemic.
While many of the stocks that did particularly well last year continue to trade at valuations reminiscent of the Tech Bubble in 2000 (i.e. Shopify, Netflix, Tesla), we have begun to see a rotation out of these companies and into far more reasonably valued companies. We would expect this to continue as we move closer and closer to a more “normal” environment and this will continue to benefit our clients’ portfolios.
Going forward, the major risk we see to the economy and stocks is the potential for inflation and a corresponding rise in interest rates. Bond markets have already indicated that we are heading higher. In the last 3 months, long term rates have doubled (resulting in long term bond values falling roughly 10%) due to the prospects of an improving economy. Central banks have indicated they are unphased by this and will keep the printing presses open. This will support elevated valuations in the short term, but we believe continued stimulus increases the risks of inflation and ultimately higher rates across the board. Considering this risk, we will continue to avoid areas of the market with elevated valuations which have benefitted from this low rate environment and flood of liquidity.
We have seen some irrational behaviour in markets recently driven in part by a retail trading frenzy in stocks such as Gamestop and AMC. SPAC’s (Special Purpose Acquisition Corporations), which are effectively a blank cheque from investors for a potential IPO-like investment, have soared in popularity. This type of risk taking has turned into a fever and is symptomatic of a broader disregard in markets for fundamentals (i.e. actual cash flows, profits etc..). This type of environment never ends well. Those who don’t learn from history are doomed to repeat it. We continue to invest prudently for our clients portfolios to achieve growth but only at what we deem is an acceptable level of risk.
We look forward to speaking with you and wish you and your families good health as the world begins to gradually move forward from the pandemic.