Weekly Market Comment: May 15, 2020

Is there a doctor in the house? Ok, an economist will do

America's top infectious disease expert Dr. Fauci warned of 'really serious' consequences if the U.S. opens too soon. The debate is worthy but, as with all complex and nuanced issues, the best policies will vary between locations to match the situation on the ground. Keep in mind that Fauci himself has said his recommendations are purely medical, not economic. Economic considerations help explain why almost three-quarters of states have relaxed restrictions thus far.

The chairman of the Fed, Jeremy Powell, also warned that the economic outlook remains "highly uncertain and subject to significant downside risks." For example, U.S. sales fell over 16% in April, its largest two month decline on record. Seeing this, Powell encouraged politicians to do more: "Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery."

And more stimulus is what we are likely to see. This week, House Democrats tabled a near $3 trillion bill to help fight the health and economic effects of this pandemic. We'll see the normal partisan wrangling but more is likely forthcoming. By the way, the following chart from Ned Davis Research illustrates what countries have been most aggressive with stimulus (relative to the size of their own economy):

fiscal support by country bar chart.

(Ned Davis Research)

While the stock market expects a quick rebound, economic data tell us otherwise

Stocks always rise before the economy recovery after adversity. Today, the discrepancy between what the stock market expects and what economic data suggests are quite far apart. Ned Davis Research shows only one of its seven leading economic indicators turning positive while this JP Morgan chart illustrates the divide we're describing:

It helps explain why many Wall Street heavyweights remain bearish and expect stocks to retrace some of its gains.

Perhaps bumper-to-bumper traffic jams aren't so bad after all?

We've reported the acceleration of driving trends toward normalcy. Chinese traffic jams are not only back to 2019 peaks but they have reportedly grown to new heights as commuters shun public transit. Drivers would rather spend more time and money commuting with their car so as to minimize the risks of catching the virus commuting with crowds. Below is yet another measure of driving trends moving back toward normal levels:

Apple mobility trends graph.

To take advantage of this trends favouring cars and more gasoline demand, last week we added Parkland Fuel and Suncor to some of our Legacy holdings. Parkland's core business is selling gasoline and diesel through their hundreds of gas stations across North America and Central America. They don't just sell fuel but they also own the stores selling items like bottles of water, hand sanitizer and mini donuts. Their 3.7% dividend yield was another motivating factor.

While we normally stay away from oil producers due to their volatility, competitive nature and often poor economics, the time to buy them is when nobody wants them.

Notable reads:

Musings Beyond the Markets

An 86 year old man sent a heartfelt letter to an eBay seller after buying a VHS machine to play his old tapes.

heartfelt letter frrom 86 year old man.


Last week, the TSX Composite dropped 2.2% as the S&P 500 retraced 2.3%.