Some COVID-19 Scars may Persist

It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.

Franklin D. Roosevelt

While a vaccine might be on its way later this year, social distancing and mobility restrictions have inflicted severe pain on some sectors of the economy. Looking at the sub-sectors of the S&P 500 that relate to tourism such as hotels and airlines, they have lagged the broad market this year. Without the resumption of business travel and easing of travel restrictions (e.g., borders, quarantine), those sectors could be slow to play catch up with the rest of the economy and the broader stock market. For airline stocks, 9/11 brought upon the industry long-term damages that took years to repair and while there might be pent-up demand for travelling, COVID scars could last long on the travel and tourism industries.

Chart 1: Tourism Related Activities will need Vaccine Shot to Catch up

Chart 1: Tourism Related Activities will need Vaccine Shot to Catch up

Source: Bloomberg, BMO GAM (as of August 24, 2020)

Dow Jones Reshuffling: New economy company replacing an old oil giant

In signs of this fast-changing economic environment, the Dow Jones stock index announced a major shake up where Exxon Mobil, which was once the world’s largest market cap, will be replaced by software leader SalesForce.com. While much of the debate has centered around Value vs Growth stocks, it’s perhaps more intuitive to instead think about Old vs New economy stocks when assessing the outlook for market constituents and sectors. Old economy stocks, from industrials to financials, which dominated the economic landscape for most of the 20th century and often operate capital-heavy operations, are being disrupted by both tech giants and capital light, highly digital, emerging firms who sometimes did not even exist 20 years ago. While Value and Old economy stocks might get a boost as we have more clarity on the pace of the economic recovery into 2021, for which the vaccine could accelerate the pace, the intensification of digitalization is not going away.

U.S. Housing Demand Propelling Home Builders with a strong V-Recovery

U.S. home builders underperformed during the COVID selloff as the economy fell into a sudden stop, but the sector rebounded quickly as housing demand proved surprisingly strong. Demand has shifted toward suburban housing, away from downtown areas, and is boosted by falling mortgage rates. While this highly cyclical sector registered a solid performance since the March lows, the pace of the housing recovery appears too strong to be sustained over the next 12 months. Its outlook largely depends on the future resilience of the labour market recovery, which will likely be tested into early 2021.

Chart 2: U.S. Housing Demand Propelling Home Builders

Chart 2: U.S. Housing Demand Propelling Home Builders

Source: Bloomberg, BMO GAM (as of August 24, 2020)

Central Bankers to Keep Chasing Inflation Bogey, But Try Something New and Hope to run it Hot

Most global central bankers were virtually meeting for the annual Jackson Hole Economic Policy Symposium last week. Monetary policy actions have been effective at keeping financial markets well-functioning during distressed episodes, but they think their policy framework must be reexamined considering the subdued inflation across major economies for the past decade. The Fed announced that it would seek to achieve “average inflation” of 2%. In contrast to the previous framework, the Fed will let inflation run above target for a period of time in order to remove the slack from the economy more quickly. This new framework suggests interest rates will stay lower for longer which will be generally supportive of inflation breaking even and lower real yields. However, letting the economy run hot is unlikely to lead to unruly inflation given significant slack globally and numerous structural factors such as demographics and digitalization.

Portfolio Update: Launching of U.S. Dollar Portfolios

We launched our U.S. Dollar ETF Portfolios in August, packaged in a mutual fund. That U.S. Dollar family of solutions is for Canadian investors seeking different U.S. investment options. The suite is proposed in 3 risk profiles: Income, Conservative, and Balanced. Our 5 Lens framework is also applied in a similar fashion as what we do within our flagship ETF Portfolios, but with a slightly different set of building blocks given that the portfolios are U.S. focused.

Disclosures

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

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