U.S. Consumers Meet the Stock-Market V-Recovery

Our greatest glory is not in never falling, but in rising every time we fall.

Confucius

Last week we got another strong indication that the economy was catching up with the stock-market optimism when U.S. retail sales rebounded by 18%, reversing a 15% drop in April. Second quarter Gross Domestic Product (GDP) will nevertheless be terrible and the Atlanta GDP nowcast estimate is calling for Q2 real GDP to contract by 45.5% (annualized) as of June 17th (Source: FRB Atlanta). We think third- and fourth-quarter growth could easily meet consensus expectations of 20% and 9% as we believe a resurgence of fear over a second wave will not trigger another economic shutdown and the ongoing re-opening efforts will continue in coming weeks.

Housing Market Holding up to our Benign Base Case

Recent indicators suggest the housing markets of Canada and the U.S. are holding up against earlier fears of a debacle. We wrote back in March that we expected a soft landing scenario for the housing market, not a bust (Source: BMO GAM). In Canada, resale activity rebounded in May, yet it remains well below 2019 levels. More importantly, however, housing prices have held up during the COVID storm and the year-over-year upward trend has even accelerated in recent months. Because housing wealth is an important driver of consumer confidence and economic activity, the resilience of the housing market will help ensure a faster economic recovery. We expect income-support measures and low mortgages rates to remain tailwinds for the housing market this summer (Chart 1).

Chart 1: Canadian Housing Prices Not Catching COVID

Chart 1: Canadian Housing Prices Not Catching COVID

Source: Teranet-National Bank, Bloomberg, BMO GAM (as of June 17th, 2020)

More Fiscal Help for Canadian Workers

With a peak of 8.4 million Canadian workers, or about 40% of the labour force, that received income support because of COVID since March, the Federal government announced last week a 2-month extension of the program. While the pace for unwinding of this support program may impact the pace at which workers are incentivized to get back into the labour market, it will clearly help boost consumer confidence and spending this summer, but it also means the Federal deficit could easily approach $300bn.

Persistent Headwinds for U.S. Dividend Stocks

With an intensifying pressure to preserve balance sheets, an increasing number of firms are either slashing or cutting dividends. Even as the economic recovery gains traction, reinstating shareholder distributions might not see as much of a V as the economy does as COVID is causing major adjustments within the stock market in favour of “New Economy” companies. U.S. dividend paying stocks were already under stress to keep up with the broad S&P 500 index, but COVID has made things worse for firms less capable of thriving when economic growth is scarce (Chart 2).

Chart 2: Dividend Stocks Pressured by Cash Bleed

Chart 2: Dividend Stocks Pressured by Cash Bleed

Source: MSCI, Bloomberg, BMO GAM (as of June 16th, 2020)

Portfolio Update: Don’t fight the Fed

Last week we increased our U.S. Investment Grade (IG) Bond exposure while reducing (mid) Federal bonds in our ETF family of portfolios. While IG spreads have narrowed from their March wide, we expect Fed buying to keep spreads in check. This repositioning from Federal debt to IG offers an additional yield pickup of about 150 basis points.

Disclosures

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.

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.

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