Commentary

Bubble, Bubble, Toil and Trouble….. or should I say Bubble, Bubble, Trump and Trouble!

Wow what a world we live in. Every so often during the course of history we have these defining moments as the human race. Those periods of time where you will look back on your life and say to your kids and/or grandkids that “I was there, I remember”. Being as immersed in the markets and the economy as Darren, Scott and I are on a daily basis is both a blessing and a curse. The extremely frothy and bubbly “recovery” we have had in the market over the past 6 weeks is a massive disconnect from what we are seeing on the ground and likely will result in some form of a reckoning or reconciliation at some point in the not to distant future…. The level of government stimulus and investor “hopium” has pushed the markets (or at least segments of the markets) off of the bottom while still being down more than 10% in Canada so far in 2020. We have participated in the rally from the March bottom by continuously increasing equity allocations in our portfolios, to now near maximum equity exposure. We continue to seek out areas that have long-term value to our client portfolios, while being mindful of the fact that the market seems to be significantly disconnected from the economy. Does any of this matter to the stock market? Apparently not.

As global economies slowly reopen, many small businesses (which create the vast majority of employment in many countries) are struggling with post pandemic regulations, access to capital, debt levels and decreased sales. Many large corporations can adapt with modern technology and many of their employees can work from home, yet that has significant implications on the economy and businesses that rely on commuter traffic, bustling downtown cores and retail. Many of these businesses are stuck in “second gear” and face a long protracted recovery. Meanwhile Amazon and UPS drivers probably have the greatest job security in the global economy at the moment. In short the post pandemic world has created a sea of change in our economy, one that we will be feeling the effects of for what I believe will be several years.  Many small businesses will disappear, capital and livelihoods will be lost. Time will be needed to readjust, redeploy and retrain both capital and people (both as consumers and employees). Does any of this matter to the stock market? Apparently not.

We still have a very active and deadly global virus that seems to be drifting to the back of peoples minds as restrictions ease and we try to resume some sense of “normality”. Couple that with the potential for a second wave and the tragic and terrible social unrest that is brewing primarily in the Unites States and Hong Kong. Not to minimize in the least the reasons for this social unrest, but the rioting, looting, and marching cannot be positives for the economy alongside the potential phase 2 risk of COVID-19. The deployment of the National Guard and the potential to send in the military compounding further social unrest is relatively shocking to say the least. Does any of this matter to the stock market? Apparently not.

President Trump has now been anointed as “Twitler” for his strong arm leadership style (forgive my political correctness) and his penchant for Twitter. Stoking his voter base and creating national divisiveness in his quest for reelection. One would question if his comments or actions were taken by any previous President how would the public react? How would the markets react? Up until this point, it appeared as if the world had become numb to his words and actions, he got a “pass” whereas others would likely have been held to account. This may now be changing. I guess we shall have a better answer to his accountability come the November U.S. election. Does any of this matter to the stock market? Apparently not.

China’s actions in Hong Kong are seen by many as a similar move to Russia’s 2014 annexation of Crimea, they are currently in the process of passing legislation that will enable mainland China to significantly tighten its grip on the territory. The draft law would target acts of secession, subverting state power and organizing and carrying out terrorist activities, as well as interference by foreign or external forces. The former British Colony has struggled to maintain it’s quasi independence from mainland China rule since the British transferred the territory back to China in 1997. The “one country, two systems” principle is eroding. The territory is one of the most densely populated in the world, yet ranks as one of the highest in the world under the United Nations Human Development Index. Keep in mind this highly developed area currently ranks sixth in the Global Financial Centers Index, right behind New York City, London, Tokyo, Shanghai and Singapore. According to the International Monetary Fund in 2019, the territory boasted the world’s 32nd largest economy with a nominal GDP of approximately US$373Billion.  As much as Putin seized the opportunity to annex Crimea in 2014 with the political upheaval in the Ukraine, President Xi Jingping is seizing his opportunity as a result of the economic turmoil associated with increased global trade and economic pressure. While China has always maintained sovereignty over the region since 1997, it is taking a hard run at curtailing its independence. As the United States continues to make every effort to assert itself as a global superpower (further evident by its move to subsequently revoke Hong Kong’s special trading status with the U.S., and its withdrawal of funding for the World Health Organization all in the midst of several trade related issues), its number one competitor is forced to make bold moves to ensure that it can maintain its status and position as a global leader. Does any of this matter to the stock market? Apparently not.

With all of these troubles in the global economic backdrop, the markets continue to move higher. Massive global stimulus and a “Don’t fight the FED” mantra (United States Federal Reserve), are keeping the wheels well-greased and moving. Thankfully our PIVOT model takes all of this into account and the signal continues to remain positive. As long as that is the case we will continue to participate and will rely on PIVOT to identify the next significant shift in market sentiment, as much as it signaled for us to reduce equity exposure on February 25th 2020 (TSX level of 17,177) and to re-enter the market on March 26th (TSX Level of 13,371). Does any of this matter to the stock market? No, but it does to us….

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