As the world slowly begins to reopen, market participants are betting that the worst of the Covid-19 crisis is behind us. As a result, North American stock markets picked up in May where April left off. We have come a long way from the worst levels we encountered in March. After one of the fastest and most vicious stock market drops in history, the S&P 500 index has recovered a stunning 39% off the bottom. Most importantly, stock market volatility lessened significantly—thank goodness.
Unquestionably, the economic headlines are troubling and may very well continue to be so for many months. However, as we know, the stock market is forward-looking and is focusing its attention on the improvements in economic conditions that have occurred since April. Whether you look at gasoline consumption, railcar loadings or even the numbers of air travelers, you will notice the North American economy beginning its slow recovery.
U.S. stocks had another excellent month. The tech-heavy Nasdaq Index returned almost 7% in May and is now up 5.8% for the year—a result no one would have believed a few months ago. Thankfully, our clients have significant exposure to U.S. stocks and are participating in the continued rebound.
Over the past few years, we have increased your weighting significantly toward U.S. stocks, and we believe that shift will continue. As investors in high-quality companies, we want to own only the greatest businesses. In our opinion, there are not enough high-quality companies in Canada with experienced management, strong balance sheets and sufficiently profitable business models to create a properly diversified portfolio. For a more detailed discussion about our U.S. stock strategy, I urge you to read my essay titled, “Shrug off your home country bias”, which is attached to this newsletter.
The Toronto Stock Index (TSX) continues to lag against its U.S. peers and is still down double digits in 2020. The TSX’s return to date would be a lot worse were it not for one company: Shopify. Shopify provides small businesses with an e-commerce platform to reach consumers around the world. It returned close to 20% during the month and is up over 100% for the year. For a moment, Shopify became the largest company in Canada by market capitalization, eclipsing the value of Royal Bank. Over the past twenty years, there have been several challengers to Royal Bank’s dominance. Some may recall that Nortel, Research in Motion, Potash and Valeant, were, at one point, larger that than Royal, until each faded into oblivion. We applaud Shopify’s success, but it is not an investable company for our clients, given that it has yet to turn a profit.
As expected, Canadian banks took huge reserves to protect their balance sheets if the Canadian economy falls into a deep recession. For the most part, investors breathed a sigh of relief as core bank earnings from National Bank, TD, Royal and Scotia were much better than expected. As well, commentary from bank management has suggested that bank dividends will not be cut.
The Canadian dollar generally goes hand-in-hand with the price of oil. By the end of May, the price of oil hit over $35 a barrel, and the Canadian dollar responded in kind. As we record our results in Canadian dollars, a stronger loonie has quite a significant impact on your returns. That said, a higher price for oil is good for Canada, and we all want Canada to succeed. For a more detailed explanation about the Canadian dollar, please read David Baskin’s essay titled, “How much is the Canadian dollar worth”, which is attached to this newsletter.
You will probably notice a few new names in your portfolios since the beginning of this year, including Costco, Canadian Apartment REIT, Netflix and Copart. We are busy researching several new names, all of them based in the U.S. so you may see a few other new additions soon.
We hope that you and your families are staying healthy, and as always, please do not hesitate to contact us at any time, we love to hear from you.
Barry Schwartz, Chief Investment Officer
Barry on BNN – May 4, 2020
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