The wild ride that has been 2020 continued unabated in the second quarter with equities recovering some of the losses from the first quarter. This has investors wondering if the stock market is paying attention to what is going on in the economy. To be fair, the economic news has been better than expected with job losses and subsequent gains much better than feared. That said, the outlook has never been murkier in the short term and the number of possible outcomes seem too numerous to count. Flare ups in the southern US as well as emerging markets fill the headlines, although experiences in most other developed markets, including Canada, has been encouraging.

The best explanation for the positive market reaction of late, beyond better than feared job losses, is that policy makers and central banks around the world have decided they are going to put a floor in the market by any means necessary. As we discussed in our first quarter commentary, the policy response has been swift and significant. While much of these actions around the world were well advised initially, we would now question whether the tap needs to be fully open. The US Federal Reserve has moved from controlling interest rates to directly investing in corporate debt issues ranging from junk to investment grade and is rumoured to be considering equities for its balance sheet. This global stimulus is unlikely to slow as the prospect of long-term debt burdens has taken the backseat to carrying the economy through the current crisis.

While continued functioning of credit markets is paramount, it does not appear to be in impending peril with junk debt issuance surging and credit spreads recovering. All of this is a nod to investors that risk taking should be encouraged and fundamentals and valuations can be mostly ignored. Not surprisingly this has created a rush into pockets of the market where valuations have been bid up to incomprehensible levels. The echoes of the tech bubble in this regard are hard to ignore and is epitomized with Shopify’s market cap eclipsing that of the Royal Bank. While a company like Shopify has a strong business model and is benefitting from the current environment, the prospects of competition from large incumbents among other risks are surely not reflected in a price that is 2000 times its earnings (versus the TSX index at 20 times earnings). Surely Shopify deserves a premium to the TSX - investors just need to ask how much?

Investors often hear the term “don’t fight the fed”. All this to say as long as monetary (and fiscal) conditions remain open for business, the market will behave more like a casino than a proper capital allocation vehicle. That is at least in the short term. As history has taught us countless times, when the tide turns, price correction for those with sky high valuations can be violent. It is imperative then, when the herd is chasing momentum, that long term investors focus on what will always matter – investing in companies with strong fundamentals (reliable earnings, solid balance sheets, dividends) at a reasonable price.

While we believe the direction of the economy is on an upward path, the return to normalcy will not occur in a straight line. Virus developments, policy errors and political infighting will result in setbacks. This will be offset by a better understanding of the virus and who it affects as well as an enormous response by pharmaceutical companies to come up with a treatment and a vaccine. Through this, our investment team is working hard to ensure that the quality and value metrics are in place in your portfolio to achieve long term success.

We thank you for the trust you have placed in us and hope you and your families are able to enjoy a relaxing summer.