Equity markets have fully recovered from the steep drop in March brought on by the coronavirus pandemic. But with millions still unemployed, and the virus not yet contained, will markets continue to climb? Kim Parlee speaks with David Sykes, Head of Public Equities, TD Asset Management.
David, it's good to see you. Let's just start with the basics if we could. As I said, many markets near all-time highs despite the fact we have millions unemployed. Why are we seeing the markets like that? And maybe you can tell us if you think it's going to persist.
- Yeah. So, Kim, hi, hope you're well. It's not unusual for the economy and the stock market to appear to be disconnected. I think a lot of times, people believe that the stock market follows the economy. But I think it's the other way around. The stock market leads the economy. And I think you're absolutely right. There is a lot of bad news. Unemployment is above 10%, a lot of people looking for work, small businesses really having a tough time.
But I think we have to pay attention to some of the good news-- some of the green shoots, if you will. And I think if you look outside of North America, China seems to be recovering, doing quite well. Some of the European countries, there's been a small second wave, but they are recovering. So the international stage has picked up economically speaking.
And I think also we need to be mindful of the fact that the market's forward-looking. And it's trying to say, OK, we've had that 35% pullback in March. We've had an amazing run-up-- I think it surprised all of us-- but I think the market's looking out a year or two and trying to discount back those future earnings and saying, you know what? Interest rates are rock bottom. The Fed is being very, very supportive, lots of fiscal stimulus, perhaps more to come in the US.
And I think the market is looking through all of this saying, yes, the economy is in tough shape now. But if you make the assumption that the worst of the is behind us-- a big assumption-- then I don't think it's that big a disconnect. And it's something we've seen many, many times in the past with other recessions.
- Let me ask you there, because, yes, we can look to some, I'll say, some green shoots, which is exciting. I think people would like to see that. We want to see it with the medical data, but that's a different story. Let me ask you about the breadth of the market, because if you look at what stocks have been moving up and what ones haven't, I mean, this has been a story of the Apples, the Amazons, the Googles, the Teslas-- I mean, the breadth of the market feels odd.
- Yeah, and it's really, really been a technology-driven market. And so you're right-- if you look at major indices year to date, the NASDAQ, technology, is up something like 25%. The S&P year to date is up something like 6%. But an equally weighted S&P-- so the average stock-- is actually down 4%. So your premise is absolutely right. There have been a small number of stocks driving the market higher.
But also, I think in finance terms, that makes a bit of sense, because in a recession, there literally is no growth. We actually have negative growth in the economy. And those stocks that you mentioned are growers. If you think about Apple and Amazon and how we're adapting our lives in a work from home, COVID, less economic activity, they're the main beneficiaries. And their cash flows are exploding. For sure, the valuations have gone up. But if you look at their most recent quarterly reports, these are phenomenal companies that have real cash flows, real businesses, real competitive advantages. And in an environment where growth is scarce, people are willing to pay up and pay up a lot for that growth.
- Is there anything that's-- not to be negative-- but is there anything that's worrying you? As I mentioned in the introduction, we're going back to school. There's a lot of people, I think, going back-- I'll call normalcy-- in September. And the numbers we're seeing right now, we are getting negative data still in terms of jobs and businesses. So what are you watching?
- Yeah, so I think that's absolutely fair. But I would also say if you look at some other statistics, things are improving. If you look at home sales and home starts in the US because of low interest rates, they're booming. Auto sales are actually up. Retail sales, believe it or not, in the US versus six months ago-- retail sales is up. Now, some people would say that's just because of government stimulus and fiscal policy, but there's a bit of good news there.
But to answer your question, the things that I'm worried about, I think it's obviously the number one concern is this is a health care crisis. Is there a second wave coming that's going to shut down the economy? I think it's fair to say that there is going to be a resurgence of cases. In other economies where you've seen really good handling of the crisis-- South Korea or Germany as two examples-- there have been hotspots and spikes, and I suspect we're going to see that. But I think the market is anticipating, and so am I, that we're not going to have to go back into a complete complete shutdown mode.
And I think the other thing that's probably worrying a lot of us investors is a lot of the noise around what I'm going to call the US election circus. It's just heating up, and we're going to have a few more weeks of this. And so I think those are sort of the two big risks on the horizon.
- Let me get-- I've only got about 30 seconds here, David-- but when you look at the US election, not so much the circus going into it, but maybe the outcome, just maybe give me a sense of what would happen, do you think, if Trump came in or Biden came in.
- So clearly, I think if Trump remains, I think you know what to expect, which is pro-business policies, tax rates stay where they are, deregulation continues. If it's a Biden victory, a lot's going to depend on the Senate. If the Senate goes Democratic and there is a clean sweep, then I think over time, you're going to see more regulation on businesses, you'll definitely see higher taxes on people who make lots of money and on businesses.
But I wouldn't get too concerned immediately. If Biden wins, he's going to inherit an economy that's going to have double-digit unemployment, and he needs an economic growth plan. So I think a lot of people who were worried that immediately taxes are going to go through the roof and regulation is going to escalate, I wouldn't get too too concerned if it is a Biden victory.
- David, always great to talk to you. Thanks so much.
- Thanks, Kim, very much.