Virtual happy hours are cool, but what about playoff hockey in empty arenas?

We expect the list of “essential” businesses to broaden before we get a clearer green-lighting, but there is no doubt that it will be a while before happy hour takes place at your favourite bar.
April 2020

I skate to where the puck is going to be, not where it has been.

Wayne Gretzky

Words of gradual reopening of the economy have sports fans excited about the possibility of empty-arena playoff hockey. This could be part of our new normal where social distancing remains trendy for months to come. We expect the list of “essential” businesses to broaden before we get a clearer green-lighting, but there is no doubt that it will be a while before happy hour takes place at your favourite bar.

Who needs fundamental analysis when central banks step in?

Fundamental analysis of the earnings and economic outlook is traditionally the number one skill for asset allocation. But following the global financial crisis (GFC), the Fed and other central banks have turned to non-conventional asset purchasing programs for conducting monetary policy. Central bank policy actions have been the most powerful driving force for risk assets in the past 10 years. 2019 was a notable year, reminding investors that fundamental indicators could go south but stocks could nevertheless climb because of a central bank liquidity-driven price-to-earnings (P/E) expansion.

Setting aside the potential noise of forward estimates in these crazy COVID times, the equity rebound from the March lows has magnified the role of P/E re-rating. Gauging S&P 500 valuation through forward P/E, it’s starting to look on the richer side (Chart 1). However, with policy response (buying of corporate bonds), coupled with zero interest rates and the potential for gradual re-opening of the U.S. economy in May, valuation and stock prices could rise further on modest good news.

Chart 1: Central banks pushing stock valuation to cycle highs

Chart 1: Central Banks Pushing Stock Valuation to Cycle Highs

Source: Bloomberg, BMO GAM (April 15, 2020)

Growth vs. value: Social distancing putting new economy into hyperdrive

Bending the curve by intense social distancing measures has accelerated a fascinating investment trend as value stocks, which have been crushed by growth stocks for most of the past decade, have suffered at an accelerated pace this year (Chart 2). The trend toward the new, digital economy has accelerated lately as we intensely rely on digital platforms to organize our daily life and work. During the COVID storm in March, we turned tactically bearish on value and think growth stocks are better positioned to navigate the economic slowdown by increasing their market share and better preserving their revenues.

Chart 2: U.S. value stocks hammered by social distancing

Chart 2: U.S. Value Stocks Hammered by Social Distancing

Source: Bloomberg, MSCI, BMO GAM (April 15, 2020)

Spring earnings season: Old news?

U.S. banks kicked off the earnings season last week and unsurprisingly showed a spike in loan-loss provisions as the economy stalls. While earning seasons always bring added market volatility, investors may shrug off bad earnings numbers like they have shrugged recent, catastrophic economic data. In a way, bad earnings are old news as investors’ focus has turned to the re-opening of global economies. Like Gretzky, investors must look at where the puck is going, not where it’s been.

Portfolio update: Cash is king for companies, dividends into confinement

France and Germany have put dividend payments into confinement and European companies receiving bailout help (Source: Bloomberg) are halting dividend payments. We think the ongoing cash crunch may cause dividend payments to be axed further than what is priced into markets. We therefore exited our U.S. dividend stocks and bought plain S&P 500 stocks along with some low-vol stocks.


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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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