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Jul 13, 2020

What Crisis?

Our research team provides an update on the spectacular rise of the technology sector, the anticipated disruptive results of the government’s intervention in the economy and the big picture items that will undoubtedly drive the second half of 2020.

By CWB Wealth Management Research Team
  • Technology stocks drive Q2 rebound
  • The artificial economy
  • What’s next for the rest of 2020
What a difference a quarter makes! The speed and intensity of the market downturn in the first quarter of 2020 was unprecedented. At the end of March, we wrote: “just as the market slid before we knew the full extent COVID-19 would have on our lives, it will also rebound before our lives are back to normal.” We made this claim based on our experience with previous bear markets and as students of stock market history. Furthermore, we backed our words with action by adding to equity weights in client portfolios in March, confident this would be the right move over a reasonable timeframe such as 12-24 months. We did not anticipate that the payoff would be this quick, as many markets rose over 10% in the second quarter. Although most global equity markets are still well off their highs, balanced portfolios of stocks and bonds have rebounded in Q2 to a level few would have believed possible at the end of March.


Returns in the first half of the year have been very narrow. Our lock-down and work from home lifestyles have accelerated trends around technology, such as ecommerce, that have been steadily growing. Investors have taken notice and bid up shares in relevant companies. Figure 1 shows a comparison of three common U.S. indices: NASDAQ (heavily weighted with technology stocks), S&P 500 (smaller but still substantial weight in Technology), Dow Jones Industrial Average (the smallest weight). The returns on Technology have been nothing short of spectacular since the market bottom. Companies like Zoom are now household names (the stock is up 273% year-to-date (YTD)). No doubt, its prospects are better now than they were pre-COVID. However, with revenues of $622M and a market cap of over $70B it appears that a lot of good news is priced in already. Some of the tech valuations and optimism around these companies are reminiscent of the dot-com bubble in 1999-2000.


Figure 1: YTD Returns of U.S. Indices
Source: Bloomberg


All of this is possible due to an extreme amount of government intervention in the global economy and capital markets. Staring down a possible depression, governments everywhere have distributed a copious amount of cash into the hands of businesses and the unemployed. At the same time, central banks have not only cut rates, but have also bought all types of different securities to keep markets functioning and corporate bond yields low. This has lead us into an artificial or “fake” economy where government support is filling the gap left by lack of employment and business activity. In fact, many people are earning as much or more through government programs than they were through regular employment! The handoff from this artificial economy back to the real economy is one of the key points we will be looking at in the back half of 2020 to determine the global economy’s trajectory. At some point stimulus will need to be removed. It is inevitable that this will be disruptive. If stimulus is removed too soon, we could see a backslide with worst case being a double dip recession. If it is removed too late, it could become entrenched, possibly leading to runaway inflation. The longer governments wait the more difficult it will be to remove. 


Besides the “handoff”, we are also focussed on the following big picture items that will undoubtedly drive investment returns in the second half of the year:


  1. COVID-19 spread. We are past the point of locking down entire economies again. People have had enough. Instead, we are more likely to see localized lockdowns in hotspots. The more lockdowns, the slower the recovery.
  2. A vaccine. Until there is a vaccine, the global economy cannot fully recover. The markets have recovered as if a vaccine will be available late this year or early next year, which would be a record timeframe for proper testing and approvals.
  3. U.S. election. A clean sweep by the Democrats (House, Senate, and Presidency) would be seen as negative for certain sectors like health care (more government intervention) and the fossil fuel industry.
  4. Corporate earnings. Valuation has not mattered through this recovery, especially for the technology sector. As the year progresses, we will need to see company earnings growing in order to justify the stock price moves off the bottom.


For most people, 2020 has been a difficult year to navigate with a lifetime of disruption packed into a short time period. As an investor, it is crucial to stay disciplined yet nimble at all times, but especially in times of stress. We are cautiously optimistic on the economy going forward but are also cognizant that there are many more unknowns today than usual. As such, we continue to focus on great companies with durable business models that are trading at reasonable valuations and with solid dividend yields to protect capital.