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Liberty November 2020 Update – What Happened in the Markets Over the Last Month

Hi folks. Brett Girard here, Portfolio Manager at Liberty, coming to you with another Liberty market update. This is for the month of November 2020.

It’s been a couple months since we’ve done one of these. We’ve been working on figuring out the right technology to use the videos and share with you, but I think we’ve landed on one now. It’s called Vidyard. Some technology out of Kitchener, so always nice to be using some Canadian content.

Let’s get started.

So first we’ll just get into a quick disclaimer.


The information presented herein is for informational purposes only and does not constitute financial, investment, tax, legal, or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor. The information provided in this recording has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such.


We want to make sure that we keep the lawyers happy and you’re more than welcome to read this, but the high level here is this is for informational purposes only. This is not investment advice, and if you do have any questions, please consult a qualified professional. Myself and the rest of the portfolio managers at Liberty would be happy to answer any of the questions that you do have.

So, 2020 in a nutshell. This is from January 1st through to November 30th. And, it’s quite the year. We can see the purple lines of NASDAQ, so that’s out in front in the lead with about a 40 percent return year to date. Next is the S&P 500, that blue line, up about 12 [percent]. The TSX is the orange line there, and it’s actually positive for the year, which is great. Below that, you can see the Dow Jones which is sort of that darker orange. And then struggling to make a positive return for 2020 is the Euro Stock 600. Still down about 5 percent for the year.

If we go into the next slide which you can see is specifically the performance over the last month. So, you’ll recall, it feels like a million years ago, but it was just the beginning of this month that—or I guess the beginning of last month now that it’s December 1st—the beginning of November when the election happened. And there’s still some items to be sorted out, but it looks like Joe Biden—who is the president-elect right now—will be the president in the oval office as of January. So, the market’s reacted positively to that.

And then also we had sort of the trifecta of vaccine information. So first it was Pfizer, then it was Moderna, and then AstraZeneca. All reported about 95 percent efficacies with their vaccines, so those have sort of been the wind in the sails of the market. And here, what you can see is actually the opposite of the year-to-date returns. The European numbers, the green index there, that’s actually done the best.

And this is something that, you know, it’s hard to do in the short term, but we really want our clients and our investors to think about this because we think about it all the time.

When something’s doing really well, there’s absolutely potential for momentum and for something to continue, but often times what we see in the market is the mean reversion.

So, Europe’s, again, compared to the other industries, not had a great year, but in the past month has bounced back in a big way. So, this is, you know, when you’re thinking about allocating capital, “If you can go to where,” as Wayne Gretsky says, “the puck hasn’t been yet. We’ll go to where the puck’s going to go.” And sometimes there’s opportunity to have a little bit of a lift.

We actually—throughout the back half of October into November—were buying European equities. And we’ve continued to do that here and there in people’s portfolios. So, this is just an opportunity that the market gives from time to time, and we want to take advantage of it when it does come up.

On the next slide here, I just want to touch on real quick. With respect to the performance of the NASDAQ and in particular the S&P, it’s really dominated by tech. And here, what you can see is that not all things gold can stay.

So, in 2000 between Microsoft, GE, Cisco, Intel, and Walmart, that was the largest five stocks as a component of the S&P, represented about 18 percent of the index. And over that time, you can see that there’s sort of a downward trend up until about 2016, where those large companies lost the percent weighting that they did have.

Now, in 2016, trends started accelerating and it was the FAANG stocks that had sort of moved upward. Today we’re in around 20 percent of the S&P, now being dominated by Microsoft, Apple, Amazon, Alphabet, Facebook.

So, what happens is this kind of hides the actual performance of the market. When you have these five names that all, as a matter of fact, sort of benefited from the work-from-home trend, and did well this year, it looks like the overall market’s doing well. But if you drill down that’s not the case; there’s not as much breadth. At least there wasn’t until sort of the middle of October. We’re starting to see more breadth come into the market now, which means there’s more performance across sectors. So, utilities are okay, retail is coming back, consumer is doing alright, hospitality looks like it’s coming back. And all of this is on the backs of, you know, the hope that the vaccine is going to change things.

But just a word of advice or a word of caution, you know, when you’re investing in these big stocks—the biggest market cap stocks that are out there—there’s a million eyeballs on them at all points in time. And sure, you can ride the trend up, but as we’ve seen time and time again, the largest companies do not always remain, right?

If you think back to 2013, the largest company was Exxon Mobile. They’ve lost about two-thirds of their value since 2013 in the face of—let’s call it pressure—around fossil fuels as well as weak energy prices. So just keep that in the back of your mind if you have too much exposure to any of these big names, it’s probably something worth trimming back and thinking more about.

What we’re going to try and do with these videos is also answer questions that we are getting a lot from clients or specifically the clients are writing in about. So, if you do have any questions, please feel free to write in. We’ll keep your name anonymous, but often times if you’re thinking something, other people are as well.

So, one of the big things that we’ve heard a lot this year is, “How can the market be up when the economy is struggling so much?” And it makes sense to just sort of lay out—a fully functioning economy has three different components that all contribute to its strength.

So, first is the consumers, two-thirds of GDP is consumer spending. So it’s you and I out there, going to restaurants, traveling, spending on clothes—all those things that we normally do and may not have been able to do as much during COVID. And part of that is really a function of consumer confidence. So, if you and I are confident about our jobs and confident of our future, we’re willing to open up our wallets and spend money. If there’s not a lot of consumer confidence, then maybe people would be less inclined to spend. And that has significant flowthrough effects into the economy.

The next pillar is business. So, businesses, you know, they create the goods and services that are consumed by the individuals like ourselves, as well as other businesses both domestically and abroad. So, it’s an important component of GDP and then GNP, which is sort of looking at how a country is doing in terms of trade around the world.

And then the third pillar is government, right? Government’s supposed to be a redistribution mechanism where taking taxes from certain groups or certain companies, people, things like that, and then redistributing them to potential areas that need it more. They’re also intending to be, or intended to be a backstop for businesses and consumers in tough times.

So, when we think of the economy, like, yes, there’s definitely some struggles this year. The consumer is hurting. That’s sort of apparent if we look around and see the businesses that are shut down and things like that. From a—and this is a chart from the St. Louis Fed—here we can see unemployment. So, through coronavirus, we got up to about 15% unemployment in the U.S., it’s now down to seven and a half [percent]. Which is half as bad as it was in March, but still about double where we were from an unemployment perspective at the beginning of the year.

So, there’s a long way to go, and consumer again, and consumers are hurting from actual spending perspective, but then from a consumer confidence perspective. Because if your job is at risk, you might not be willing to spend and stimulate the economy.

Next, we can look at corporations. So here, we have the orange line, which is the most important, and this is corporate profits after tax. Here you can see if you look back in the financial crisis, there was a big drop at this—scale is not that strong—but in 1987 as well as 1974 there were drops. And obviously, here in COVID there is a big drop in corporate after-tax profits.

So that’s something to be aware of, and it’s really something that’s causing a concern in the market because what’s happening is corporate profits are dropping, but stock prices go higher. And what that means is valuations are becoming more and more rich, right? You’re having price to earnings multiples, and price to sales multiples grow, which as we know, again with that mean reversion, they cannot grow forever. So, we just need to be cognizant of what our dollars are being invested in, and what the underlying economics of those companies are like.

And so, you know, the consumer’s hurting, corporations are hurting, and how are we chugging along? How is the market doing what it’s doing?

Well, really here, this kind of is the one picture that speaks a thousand words. You can see the S&P index is that red line and then the blue line, which looks like it tracks very closely—and in our view’s not even a correlation, but actually a causation—it’s the central bank balance sheets from around the world. So here we’re plotting the dollars that the Fed in the U.S., the ECB in Europe, and the BOJ in Japan have injected into the market. And there’s a pretty close relationship between how the balance sheet has expanded, and how the stock market has gone up. This is something that we have to keep an eye on though because balance sheet expansion is not free. It comes at a cost as governments put more money in, they have to borrow more money. While interest rates are low, they can cover their borrowing costs just like you and I, but at some point, if interest rates do start to back up, then it’s going to be very significant costs on the backs of the governments, which is going to flow through and impact the social programs and other spending the governments can do.

So just an interesting chart. We’ll have to continue to keep our eye on this going forward. And you know, closer to home here in Canada, the Liberals unveiled a hundred-billion-dollar stimulus plan. It’s going to push 2020s deficit somewhere between 380 and 400 billion, and it puts our federal debt at more than 50 percent of GDP. So that’s a risky area. You know, you can understand the government’s position in the sense that they have to stimulate, and they have to get the country through this lockdown. We understand that, but we’re just saying that it’s not without consequence. When you stimulate this much and when you put all this money into the system, eventually you have to pay for it. You know, as David always says, “Debt doesn’t disappear.” And this is government debt which is going to have to get paid off either through higher taxes, through less social support, or some other mechanism that we’ll have to see what they come up with next.

So another question that we’ve been getting from the clients across the board is really, “What are you expecting in the stock market next month?” We’ve had sort of, you know, a really interesting 11 months, what’s the twelfth month of the year going to look like?

And from our perspective, you know, I think the thing to expect is volatility. And we’ve seen volatility throughout the year, but in particular, we’re going to see less liquidity, so less people are going to be trading as they start to go into the holiday season. Some people are going to take their gains and shut it down for the year. So, when you have less supply and less demand in the market, it can mean that prices can move more than they otherwise would.

We’ll probably see some rebalancing. So, what that means is that the stocks that have done really well, oftentimes from a risk perspective, investment managers will decrease the weightings of those. So stocks that have gone, you know, have had good years, will see some selling pressure as people try to take some of their gains. The flip side is we might see some tax-loss selling. So there, the stocks have done really bad, we might actually see even more pressure because people are saying, “Let me take this capital loss, and on Canada gains potentially some of my capital gains for the year.

One of the other trends that tends to happen in December is what’s called the “Santa Claus rally.” So, from our perspective, because you know we’re not trading the portfolio, this is really just window dressing. And with window dressing, what the portfolio manager is doing is they’re saying, “I didn’t hold a stock that’s done really well this year but let me put it into my portfolio so that when I report at the end of December, it looks like I’ve been smart, and I’ve been holding this company along the way.”

The other thing I think is that Congress is potentially going to pass some sort of stimulus bill before the end of the month. There seems like  some bipartisan conversation right now between the US between the Republicans and the Democrats, but the chances are it’s going to be more of a skinny bill which wouldn’t be as much stimulus as the Democrats potentially want. So that could have some impact in the market given the sort of correlation between government stimulus and what the S&P 500 has done.

At the end of the day, what we’re going to do is what we’ve been doing all year. We’re going to look for opportunities where there’s mispricing and potentially pull the trigger to increase our allocation to stocks that are trading, you know, below what we think is the fair value. But at the same time, we still want to hold a bunch of cash because getting into 2021—even if Joe Biden gets in—there’s still a lot of work, right? He’s not going to be able to flick a switch and change things dramatically, and the same goes for the vaccine. There will be vaccines coming, but it’s probably not going to be something that happens in the first quarter of the year. So, there is light at the end of the tunnel, but probably still some bumps along the way. And that’s why we wanted to have cash—to take advantage of any short-term opportunity.

As always, thank you very much for tuning in. We really appreciate you taking the time to do so, and if you have any questions, please reach out to myself, David, or Annie. Take care, bye-bye.