COVID blues during spring blossom

The economic and health news flow remains bleak, but investor’s focus has turned to the timing and re-opening process of the economy.
April 2020

All through my life, I have been tested. My will has been tested, my courage has been tested, my strength has been tested. Now my patience and endurance are being tested.

Muhammad Ali

The economic and health news flow remains bleak, but investor’s focus has turned to the timing and re-opening process of the economy. Rallying through bad news is a positive sign that investors are increasingly resilient to COVID and that asset prices reflect a lot of pain. Getting the economy back on track will mostly depend on the evolution of COVID caseloads, but we expect a gradual normalization. Working from home and the 2-meter distancing rule could be trendy most of the summer season.

Investors Building COVID Immunity

Recent investor optimism can be explained by the flattening of the COVID curves in most advanced economies (Chart 1). There is light at the end of the COVID tunnel. In coming days, we expect the absolute number of new cases and death to reach staggering levels in Canada and the U.S., but the spreading rate is slowing, as seen the flattening of the logarithm case count.

Chart 1: Cases are Rising but Curves are Bending, Peak in Sight

Source: Bloomberg, BMO GAM (April 9th, 2020)

Dispersion in TSX Sectors

Large market dislocations have led to large performance dispersion across S&P TSX sectors (Chart 2). Unsurprisingly, the top 3 performing sectors so far in 2020 are the typical defensive sectors (Communications, Utilities, Consumer Staples). On the other end, pro-cyclicals sectors (Energy and Consumer Discretionary) have suffered more as households are getting a historical income crunch. Lastly, Canada’s Healthcare sector, which is mostly constituted by cannabis companies, has suffered a lot but the direct COVID impact is probably more related to their weak balance sheets prior to COVID.

Chart 2: Year-to-Date Top/Bottom 3 S&P TSX Sectors

Source: Bloomberg, BMO GAM (April 9th, 2020)

Since the March 23rd low, Energy and Utilities have outperformed but we continue to doubt the rally of the Energy sector has enough legs to drive a sustained outperformance of the sector. Energy prices are unlikely to recover to profitable levels during the next couple quarters. Even if oil producing nations agree to curtail oil production, it’s unlikely to match the ongoing collapse in demand and the limited storage capacity.

Investor Resilience Will be Tested

While all is not clear yet, bond yields are stabilizing, stocks are pushing higher from their brutal March lows as the COVID curve is bending, a key ingredient to get people back to work. The path to normalization will be gradual and feel slow. Investor resilience will be tested again, especially around the upcoming earnings season as we will get more clarity on the near-term impact to sales and earnings.

Portfolio Update: Riders on the Storm

For the most part, we have been trading the managed solutions and working our way towards our target of slight overweight in stocks after buying battered equities and mostly selling safe-haven government bonds.

For investors that remain skeptical of what the future holds over the next couple weeks or months, dollar-cost-averaging remains the best strategy to benefit from cheaper asset valuations. It’s probably a good time to apply the old contrarian adage that investors should buy when there is blood on the street.


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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