Historical Surge in Layoffs: April was the rock bottom

Shutting down the economy took a heavy toll on the job market in Canada and the U.S.
May 2020

It’s now clear that once the emergency is past, the world will not look the same… Ultimately, we’ll see a long-term acceleration of movement from businesses to digital services, including increased online work, education, medicine, shopping and entertainment. These changes will be significant and lasting.

Sunar Pichai, CEO of Alphabet

Shutting down the economy took a heavy toll on the job market in Canada and the U.S. (Chart 1). Between March and April, about 3 million jobs were lost in Canada and over 20 million in the U.S. However, with the re-opening of business activities starting this Month, the job statistics for May should mark the beginning of a long recovery. The good news is that the economy appears to be through its abysmal trough. For Canada, it will help that prior to the economic destruction of the virus, there were close to half million job vacancies, a record high. The recovery will be very uneven across industries, with energy, entertainment, and airline companies most likely lagging the broader economic recovery. The list of falling companies because of the coronavirus will probably increase in coming months even as the economy gradually re-opens for the U.S. (Source: Forbes)[i] and for Canada (Source: Retail Insider)[ii].

Chart 1: Two months of abysmal job destruction

Chart 1: Two months of abysmal job destruction

Source: Bloomberg, BMO GAM (May 14th, 2020)

Rising Market Concentration: COVID prays on the weak

The COVID-induced recession has amplified the divide between oligopolistic digital disrupters versus the rest of the market, as the economic shut down is particularly praying on the weak. Looking at the top 6 U.S. tech companies (Netflix, Google (and Alphabet), Amazon, Apple, Microsoft, Facebook), they now represent a little over 25% of the S&P 500. The coronavirus pandemic has created a unique opportunity for these tech giants to completely disrupt how we socialize, learn, work, shop and get healthcare, enabling them to expand their market share. In this context, it’s not surprising to see their weight in the S&P 500 sharply increase (Chart 2). The virus has fast-forwarded the obsolescence of many things in life, and we believe investors should be careful when expecting an outperformance for sectors and companies that are less capable to adapt and survive to the post-COVID world.  

Chart 2: Weight of S&P 500 for FAANGM Companies

Chart 2: Weight of S&P 500 for FAANGM Companies

Source: Bloomberg, BMO GAM (May 14th, 2020)

Portfolio Update: Market volatility calls for diversification

There were no major changes to our flagship portfolios last week. However, the 2020 market volatility has been a great reminder for investors for the need to construct diversified portfolios. When risk assets struggle, they all seem to struggle at the same time as correlations jump to one. During the recent volatile markets, it’s been hard to find an asset class that has bucked the trend of the broader selloff. But despite their very low yields, government bonds have remained successful diversifiers for balanced-fund investors. While return expectations for fixed-income investors have steadily declined over the years, high-quality, fixed-income assets continue to provide diversification benefits to balanced solution and they still tend to rise in prices when equity prices are falling.




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