The long awaited summer came and went in a flash as another quarter flew by. Q3 was a bit more trial and error as the reopening of the economy (restaurants/stores/offices) was phased-in with caution in Canada. Covid-19 cases remained low at the start of the quarter but started to spike again as the quarter came to an end.
The Canadian government continues to be supportive to ensure citizens will be able to endure these times of hardships. While there was optimism that people were returning to work and the unemployment rate looked to be declining from the heights of the pandemic, Canada is funding its way through the pandemic with debt. The province of Quebec announced a one-month lockdown for October towards the end of the quarter, setting alarms that this pandemic is definitely here to stay and drawing concerns that other provinces will follow.
Heading into the start of the quarter, for the first time in anyone’s living memory, the world was forced to shut down and hibernate (or “social distance”) due to the threat of COVID-19. While countries and cities around the world slowly reopened throughout the quarter, most of the quarter seemed like a blur- people woke up confused about what day it was, where they were working and how or where to shop. Many had assumed back in February that we would be “done with this virus” post the normal flu season but, here we are entering Q3 still trying to understand it and get ahead of the battle to “flatten the curve”.
As we started the new decade, traders all over the world had a new bounce to their step – no confidence could be shaken as we ended 2019 stronger than ever with optimism.
Then, rumblings of a “flu” broke out in China. The severity seemed so far away (only one province in China was impacted). By the end of January, China announced its plans to start strict quarantines and shut down factories after Chinese new year (early February).
Google search defines intention as “an aim or plan” and (in medicine) “the healing process of a wound.”
The latter is rather befitting given how 2018 ended: anyone who participated in the markets in 2018 was pretty badly beaten up that December. Almost every asset class lost money in 2018. Healing from those 2018 battle wounds was going to take time as everyone knows that even with the most determined patients, there could be challenges along the way. Thankfully, we saw progress in 2019.
“Fed” Up with the Volatility?
As the days go by, it feels like weeks have passed – only because they are so jammed packed with news. These are the days of our lives (yes – it does feel like a soap opera). Intraday moves feel more violent. Like the chart on the left vs. the chart on the right below. What happened on those days?
Most of us will remember Q2 as action-packed with highs, lows, explosive plays, trash-talking, team effort and finally, victory: Yes, the TORONTO RAPTORS are the NBA champions! Who would have thought that the underdogs would gain NBA power? Now that the playoffs are over, the 56% of us Canadians that tuned in to cheer for our beloved Raptors are now dragging our feet to get back to things we have sidelined. The financial markets had a very similar quarter to that of the Raptors’ fans.
Once January 1st hits everyone knows that the days ahead are likely to be long, dark and cold – welcome to Canadian winter. This year was no different. Mother Nature was not the only one to bring on an early winter depression particularly in the US: about 25% of US government employees started the year with no pay cheques since December 22nd and it was unclear when the government shutdown would end; the equity markets were at a 52-week low (though the S&P 500 was only down 4% for 2018, the sell-off in Q4 sounded alarm bells of a 2008 repeat); and trade wars between US/China continued to elevate while another battle with US vs. Europe was starting. Not to mention global growth fears, unresolved Brexit and Canada/China relations added to more uncertainty.
How did we get here?
Negativity is Contagious.
Every action causes a reaction – so has the negativity just spiraled out of control to a self-inflicted recession? The fourth quarter started with a lot of promise as the third quarter ended with a lot of positives: 1) NAFTA being “resolved”; 2) the Fed continued on pace with its well-telegraphed interest rate hike (signaling a strong economy); and 3) oil at a 52-week high of US$76/bbl (WTI crude). However, the best highs seem to be short lived and the fourth quarter ended in a more dire state – oil went into a tailspin with WTI crude hitting a 52-week low of US $42/bbl with oversupply concerns, growth fears were amplified as Q3 earnings in the S&P were mixed from expectations (guidance were revised lower on trade tariffs impact and slower growth) as the S&P tumbled to a 52-week low. While the data coming out shows the economy continues to chug along (for now), skepticism continues to build as negativity continues to spread first in equities and then throughout every other market. It is a vicious cycle.
Summer has come and gone and we could have put the snooze button on and enjoyed the weather a bit more rather than watch prolonged unnecessary drama. Over the quarter, the markets have moved but not unexpectedly – volatility remained but directionally we knew where interest rates were going.
This quarter was not short of drama: global volatility continued with trade wars heating up between the U.S. and China as other countries, companies and consumers watched with concern on what/how/when this will impact them; the European Central Bank motioned that it would end 3 years of quantitative easing by December but will now keep interest rates low until mid 2019; new Italian PM promised radical change causing an increase in Italian bond yields. Closer to home, NAFTA negotiations are on going with the potential of a new agreement not signed until after the U.S.’ midterm elections in early November, while the U.S. slapped tariffs on Canadian steel and aluminum products June 1st and the Mexican elections concluded with a left-wing, anti-establishment government being elected on a radical reform platform.