Since the bottom of the equity markets on March 23rd there has been a Phoenix like revision to the upside, gravity defying, inexplicable. Today, at time of writing, the DOW is now back to about 25,000 from the tippy top of about 30k. Not that far off. As we have said, to this point the equity markets have been driven by hope and optimism, certainly not fundamentals or a strategy. BUT, you can’t argue with City Hall.
For the past month we, like many have been expecting a pullback which hasn’t materialized. Not that it won’t but it again shows the value of keeping invested, even when it’s looking negative. As we have said before, if you are trying to time the markets, you are either lucky or you’re wrong.
At this point, the equity markets have written off the 2020 year and are looking ahead to 2021. Manulife Asset Management figures that there is a 60% probability over the next 18 months that the markets will be higher by 5% to 15% from where we are now. This is their base case. They have a bullish case of 25% upside with a 15% probability. In other words, they are attaching a 75% overall probability of a positive 2021. They assign their bear case of a negative market with a 25% probability of occurrence.
As you know our strategy as always is top down, beginning with asset mix equity to fixed income and then drill down geographically and into sectors. The goal is to select those sectors and securities that we expect to outperform and avoid those that we expect to underperform. There are many examples of companies that have done very well through this “shelter at home” period: in technology, health care and staples. The flipside is that there are examples which are just the opposite: banks, industrials, energy.
Our message here with respect to equities is to rebalance and hold the course and for some, possibly dollar cost average up another 5%.
In fixed income, we continue to be bullish on corporate credit or high yield bonds. They behave similarly to equity but with much less volatility. Regarding interest rates, which impact bonds, we are of the view that rates will remain where they are, i.e. low for a very long time given the economic circumstances.
In closing, the first half of the 2020 year has seen great changes and challenges. In the case of improving racial inequality and injustice, these changes are long overdue. If you are feeling anxious about social tensions in the U.S. and elsewhere with regards to equity markets, you should consider that the markets historically don’t react significantly to social upheaval. Social reforms are instead felt more widely on a cultural, social, and political basis. As always if you are feeling anxious about your accounts or just want to chat, we’re here for you.
Scott & Zoe
This publication contains opinions of the writer and may not reflect opinions of Manulife Securities Incorporated and/or Manulife Securities Insurance Inc. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer or Manulife Securities Incorporated and/or Manulife Securities Insurance Inc. or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisors for advice based on your specific circumstances.