A recession like no other

Unlike previous recessions, the value of a U.S. used car has risen sharply this summer as our daily lives are profoundly impacted by social distancing and the sudden COVID-induced de-urbanization wave.
August 2020

The last five months have made it clear that tech intensity is the key to business resilience. Organizations that build their own digital capability will recover faster and emerge from this crisis stronger.

Satya Nadella, Microsoft CEO

When a recession hits, the traditional response of households is to liquidate non-essential big-ticket items such as cars, RVs, cottages or boats. In the U.S. and Canada, used cars are seeing increased demand for a couple of unique reasons. Fear of public transit and the ability and desire to escape densely populated cities are fueling an unusual demand for used cars as many workers have switched to work-from-anywhere mode. Unlike previous recessions, the value of a U.S. used car has risen sharply this summer as our daily lives are profoundly impacted by social distancing and the sudden COVID-induced de-urbanization wave.

Severe restrictions on international travel have drastically altered vacation plans of Canadians who can no longer leave the country. The closing of the Canada-U.S. border and other travel restrictions have triggered another unusual boom during a recession with a strong demand for cottages this summer (Source: The Globe and Mail). RV demand has also surge (Source: CTV News) while boat sales are breaking records (Source: CBC News). This is truly a unique recession.

Chart 1: Used cars seeing unusual recessionary demand

Chart 1 Used cars seeing unusual recessionary demand

Source: Manheim, Bloomberg, BMO Global Asset Management (as of June 30th, 2020).

Canadian consumers remain confident

Aside from losing their job and income, the most important channels for wealth destruction during recessions are the equity and real-estate markets, whose swings directly impact consumers’ confidence. We think household confidence will continue to improve as household wealth remains largely immune to COVID, albeit the March steep selloff shell-shocked investors and will likely leave consumers a bit more cautious. While the easiest part of the recovery is probably behind us, it’s facing less headwinds with resilient consumers. The other key anchor to consumer resilience is the massive income support programs, as fiscal policy is doing whatever-it-takes to keep things going.

Our main concern regarding consumer confidence is the outlook for the job market as the recent stagnation of U.S. Initial Jobless Claims, and other high frequency data such as workplace activity and employment surveys, suggest job creation could be much slower this summer than the surge observed in May and June. Fragile labour market indicators should keep yields on government debt solidly capped and support interest-rate bond duration even though government bonds are by no means cheap in Canada.

Chart 2: V-shaped recovery for Canadian sentiment

Chart 2 V-shaped recovery for Canadian sentiment

Source: Nanos, Bloomberg, BMO Global Asset Management as of July 24, 2020.

Portfolio update: Steering steadily as visibility improves

The positioning and tilts of our portfolios remained largely unchanged in recent weeks. In a world where interest rates remain anchored near zero, deeply below inflation, equities remain attractive relative to bonds even as the economy and earnings are going through a rough patch that might persist late into 2021. If the economy wobbles, we would expect policy makers to deliver more stimulus, so the economy recovers sooner rather than later. The macro backdrop dominated by free money and fear remains highly supportive for gold even as the shiny metals is nearing records highs.

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