Show Transcript
Kim Parlee talks to Brad Simpson, Chief Wealth Strategist, TD Wealth to answer key questions on the minds of investors amid the COVID-19 crisis including the depth of the recession, the speed of the recovery, and whether a bottom has been established in equity markets.
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Hello and welcome to MoneyTalk’s Covid-19 Daily Bulletin for Wedsnesday April 15th. My name is Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Brad Simpson, the Chief Wealth Strategist at TD Wealth, on some of the most pressing questions on investors’ minds these days. But first, a quick wrap of today’s market news.
Statistics Canada said the country’s GDP dropped about 9% in March, which would represent the biggest one-month decline since at least 1961. It gives further evidence of financial toll the coronavirus spread is having on the economy.
The Bank of Canada left a record-low interest rate unchanged at 0.25%, as widely expected.
President Donald Trump announced that the U.S. is suspending funding to the World Health Organization while he refused the agency’s response to the coronavirus pandemic.
Meanwhile, the WHO issued guidelines for lifting restrictions, but said easing too quickly could lead to a deadly resurgence. Austria and Denmark are among nations that are beginning to ease lockdown measures.
And finally, US crude prices are under pressure today, after the International Energy Agency warned that global demand would plunge by 29 million barrels per day in April, leaving demand at its lowest level in more than two decades.
And that’s a wrap of today’s Market News. Next, we have a conversation with Kim Parlee and Brad Simpson.
Brad, let's start with the first question. Will there be a recession? And if so, how deep?
Well, let's start with the first part is an emphatic yes, and then really trying to come to the conclusion on how big of a recession, boy, that's a tough one. Why don't we look a little bit about a TD economics point of view on this is a couple of weeks ago there was an awful lot of revisions downwards for the global economy from there.
So let's look at right now we have forecasted out for the United States a retraction of about 3.6%. Canada's kind of in the same boat. Looking out into Europe, we're a couple hundred basis points above that.
But I think you have to look at any of this data in an environment like here that this economy is slowing, and we're right now going through a slowing maybe at the quickest rate we've seen since the period leading into the Great Depression. And that's not what we're saying, but that's the kind of slow we're starting to see right now.
Now, the interesting part of that is-- one of the key attributes of this downturn is how quick it's been, and so we also believe that the quick downturn will also-- the other side of the coin is that we'll have one of the quickest bounces back we've ever seen, as well, too.
So all of a sudden, these negatives, you start looking at the same number down looking at going forward, a year out looking at the Canadian economy growing at 4%, US economy kind of growing at that as well, seeing the Chinese economy where we think it's slowed to around 3 and 1/2% growing at 8% when we start flowing through '21. So kind of grim up front, better as the further out you get.
Let me ask you, then, how does this market event that's taking place compare to others? And I'm going to bet the big difference is the level of support.
Yeah, yeah, for sure. You know, the way I always kind of try to frame this is that if you thought about kind of your key attributes of a downturn, if you took the ingredients of 1987 for the sharpness of the decline, added in 9/11 from this kind of outside source that kind of hit the economy, and then you throw in a debt crisis of '08, and you throw those three ingredients together, you get kind of what we're experiencing right now. And I'm sure you and I could agree that if we were going to put three things together, those are the ingredients we wouldn't be using.
But the flip side of that is, if you were going to go through a crisis, is that we've gone through three like this before, so we've learned a ton. That's one of the wonderful things about us human beings is we learn as we go along, and we have a certain playbook to do in these three different scenarios, and we're seeing an awful lot of that right now.
So first and foremost, we're seeing central banks taking extraordinary measures throughout the economy. But, most importantly, really starting out with employment, we're going to see some-- last week, we saw an unemployment number of 6 million, and we're going to-- probably we get four weeks out, we might be looking at an unemployment number in the United States of another 20 million job losses, and all of those people out of work can be a fairly frightening scenario for an economy.
We've learned that in the past, right? And so we've done measures to be able the help and support and provide income. This has been devastating to small businesses, main street small businesses. So we've seen all kinds of activity to be able to support and help in that part of the economy as well.
And of course, in the large respect of large corporations, they too have gone through just a devastating set of blows here, and so both central banks and our political leaders-- something we were really slow on in '08-- we've seen a lot more activity by political leaders as well.
Let me get through a couple of these other questions. This is a biggie I know we're hearing from people. People were prepared-- didn't say they like it, but they were prepared for markets to be down, equity markets to be down. A lot of questions, though, why fixed income is down too. I mean, that was supposed to be a hedge.
Yeah, I think that's one of those things for an investor that is so difficult to understand or get one's head around, and I think the starting point of that is that we have a culture of talking about stock markets and equities and equity investment. And meanwhile, we have this incredible market out there called the fixed-income market that has all kinds of different layers and is structured in a very different way.
And so when you have a fixed income-- I think most of us, when we say we have a fixed income, is using a hedge versus my stock or my equity portfolios. What you're saying is that I own government bonds, typically, which are guaranteed, of course, by whatever nation state that issued them through their central bank, and they're incredibly safe because governments have the ability to be able to tax.
Once you leave a government-guaranteed security-- and let's face it. We're talking about the US Treasurys, Canadian guarantees, the big European nations, Germany and France, the UK, and then, of course, looking at Japan, those are considered really safe government bonds.
But other fixed-income investments are corporate ones, and they come to a varying degrees of quality. So you can have an investment-grade bond, which is the highest rated and considered the most secure and safe bond. Then you kind of go down, like a capital stock, if you will, from there.
Basically, if you take a look at-- we'll probably circle the date March 19 of this year was the beginning of a very similar scenario that we saw in '08. Credit markets are something that basically flows based on money flows flowing in between it. And like '08, they stopped.
We were in the midst of a funding crisis, and that funding crisis had an impact on all bonds government. Like, you saw a US Treasury bond, for example, move from yielding 130 basis points down to 30 basis points, back up to 130 basis points in 72 hours, which is absolutely extraordinary, and that was due to unwinding of really leveraged investments out there based on government treasuries.
That unwinding moved into the corporate bond market. And so you could own very good investment-grade bonds that for a few weeks were really mispriced in a really terrible way. High yield-- you could have some quality high yield names that were also getting priced that way.
And so I think the way I sort of put it into context of this is that, when you look at your equity investments, there's an old famous saying that says, you only find out who's swimming naked when the tide goes out. And that means, all junky companies, in a great market, everything goes up.
Fixed income's the exact opposite. You only find out how you've done is when the tide comes back in. And so the difference in pricing that we've really seen here is that we're going to have to think about, as credit markets get healthy again and get the money flowing again, that's when you have to start looking at your fixed-income investments and really seeing how your non-guaranteed, your non-government guaranteed ones are doing.
And one of the things we opened up here today was about federal central bank policy. Last Thursday was just an incredible day for central bank policy for corporate bonds.
KIM PARLEE: I want to move on, if I can, to talk a bit about the banks because there's a lot of people who hold a lot of Canadian banks. What is this all going to mean for shares in Canadian banks?
Now, the number one favorite question by all Canadian investors-- what does this-- as Canadians, the banks are an incredible part of our lives for employing people, for mortgages and in housing and commercial real estate. And of course, it makes up so much of our index that there's an awful lot of memories, again, of going, well, gee, the last time I saw a debt crisis, which was '08 and '09, it had a really devastating impact on the price of bank stocks.
And so I think a lot of investors kind of immediately went back to that and said, uh oh, what is this going to mean for the companies that I own there? And I don't want to downplay this, but, in comparison to that time, very little. Since 2008 and '09, there have been an enormous amount of changes in the structure of banks and the type of business that they do, the type of leverage that they're being able to use.
And so looking at our own work, if I go over and look at the work of TD securities, we have a really good analyst group there. Their analysis of basically the whole Canadian bank sector is one that they're still in profoundly good shape and in an excellent position to be able to weather this environment.
The second question that most Canadian investors have is, oh, gee, what is it going to mean to my dividends? And to date, we think those dividends are pretty secure. And so we're not thinking that you're going to see a change in those any time soon.
And so the only byproduct, the warning, I would say, with that is that many Canadians, when they're building their investment portfolios, probably have too much allocation to that sector, and it might be wise to use this as an opportunity to take a look at your diversification and make sure that your portfolio isn't overweighted into that, because there's definitely is still a lot of headwinds for banks to be able to work through here in the coming quarters.
All right, Brad, I've got two important questions and only a couple of minutes. So let me get them at you rapid fire-- immediate and long-term impact of the oil deal between Saudi Arabia and Russia, which the market's just basically shrugged off.
Yeah. The immediate is very little. 9.8 new barrels have taken that out of the market and when we have-- absolutely inventories are full. There's nowhere to store the stuff. And then the flip side of that is there's almost no demand.
And so in the short term, I mean, I give you an incredible stat of-- looking in Europe right now, it's estimated that CO2 emissions are down 60% right now, and that's because there's just so little automobile traffic, and that's going to take a while to be able to work through.
Let's say you get out 3/4. I think you start to see that inventory gets worked through a little bit, and it can probably be tough times for oil prices here in the near term. You start getting out about eight months out, I think you could see it higher than where it is from here, for sure.
Last question and I think the one that most people are focused on-- have we found the bottom?
Well, I think that's the magic question we all want to know, and so I think-- I'm going to try to look at it in a couple different ways. One that folks really like to consider is technical analysis. We've had this big drop. Typically when you're at the end of a bear market, you have these two big lows.
I'm not a big believer in technical analysis, and I think in this scenario it's highly unlikely that we would have the second drop, and that is just because there is so much monetary and fiscal support going into this economy right now, which it's filtering its way into the market. So I would say that's going to make that kind of double bottom incredibly difficult.
The second part is that I think what we want to see and we're starting to see a lot of-- typically, bear markets come to an end when public companies come out and stop revising their earnings per share downwards. I mean, we do it in a really aggressive way.
We're starting to see some of that, but we have a bunch of that to go. So I think that once we start to see that work its way out, I think that's going to start to be able to tell the tale of the tape.
And then, of course, then the last one, which I think could get us override given-- the overriding factor in this is, with this COVID-19, when do we start seeing new cases stop, decline, and we start to see it work our way backwards? That's really when we're going to see that end. But it's hard to see that this market goes back to the lows that we've already seen.
Brad, thanks very much.
Thank you.
Statistics Canada said the country’s GDP dropped about 9% in March, which would represent the biggest one-month decline since at least 1961. It gives further evidence of financial toll the coronavirus spread is having on the economy.
The Bank of Canada left a record-low interest rate unchanged at 0.25%, as widely expected.
President Donald Trump announced that the U.S. is suspending funding to the World Health Organization while he refused the agency’s response to the coronavirus pandemic.
Meanwhile, the WHO issued guidelines for lifting restrictions, but said easing too quickly could lead to a deadly resurgence. Austria and Denmark are among nations that are beginning to ease lockdown measures.
And finally, US crude prices are under pressure today, after the International Energy Agency warned that global demand would plunge by 29 million barrels per day in April, leaving demand at its lowest level in more than two decades.
And that’s a wrap of today’s Market News. Next, we have a conversation with Kim Parlee and Brad Simpson.
Brad, let's start with the first question. Will there be a recession? And if so, how deep?
Well, let's start with the first part is an emphatic yes, and then really trying to come to the conclusion on how big of a recession, boy, that's a tough one. Why don't we look a little bit about a TD economics point of view on this is a couple of weeks ago there was an awful lot of revisions downwards for the global economy from there.
So let's look at right now we have forecasted out for the United States a retraction of about 3.6%. Canada's kind of in the same boat. Looking out into Europe, we're a couple hundred basis points above that.
But I think you have to look at any of this data in an environment like here that this economy is slowing, and we're right now going through a slowing maybe at the quickest rate we've seen since the period leading into the Great Depression. And that's not what we're saying, but that's the kind of slow we're starting to see right now.
Now, the interesting part of that is-- one of the key attributes of this downturn is how quick it's been, and so we also believe that the quick downturn will also-- the other side of the coin is that we'll have one of the quickest bounces back we've ever seen, as well, too.
So all of a sudden, these negatives, you start looking at the same number down looking at going forward, a year out looking at the Canadian economy growing at 4%, US economy kind of growing at that as well, seeing the Chinese economy where we think it's slowed to around 3 and 1/2% growing at 8% when we start flowing through '21. So kind of grim up front, better as the further out you get.
Let me ask you, then, how does this market event that's taking place compare to others? And I'm going to bet the big difference is the level of support.
Yeah, yeah, for sure. You know, the way I always kind of try to frame this is that if you thought about kind of your key attributes of a downturn, if you took the ingredients of 1987 for the sharpness of the decline, added in 9/11 from this kind of outside source that kind of hit the economy, and then you throw in a debt crisis of '08, and you throw those three ingredients together, you get kind of what we're experiencing right now. And I'm sure you and I could agree that if we were going to put three things together, those are the ingredients we wouldn't be using.
But the flip side of that is, if you were going to go through a crisis, is that we've gone through three like this before, so we've learned a ton. That's one of the wonderful things about us human beings is we learn as we go along, and we have a certain playbook to do in these three different scenarios, and we're seeing an awful lot of that right now.
So first and foremost, we're seeing central banks taking extraordinary measures throughout the economy. But, most importantly, really starting out with employment, we're going to see some-- last week, we saw an unemployment number of 6 million, and we're going to-- probably we get four weeks out, we might be looking at an unemployment number in the United States of another 20 million job losses, and all of those people out of work can be a fairly frightening scenario for an economy.
We've learned that in the past, right? And so we've done measures to be able the help and support and provide income. This has been devastating to small businesses, main street small businesses. So we've seen all kinds of activity to be able to support and help in that part of the economy as well.
And of course, in the large respect of large corporations, they too have gone through just a devastating set of blows here, and so both central banks and our political leaders-- something we were really slow on in '08-- we've seen a lot more activity by political leaders as well.
Let me get through a couple of these other questions. This is a biggie I know we're hearing from people. People were prepared-- didn't say they like it, but they were prepared for markets to be down, equity markets to be down. A lot of questions, though, why fixed income is down too. I mean, that was supposed to be a hedge.
Yeah, I think that's one of those things for an investor that is so difficult to understand or get one's head around, and I think the starting point of that is that we have a culture of talking about stock markets and equities and equity investment. And meanwhile, we have this incredible market out there called the fixed-income market that has all kinds of different layers and is structured in a very different way.
And so when you have a fixed income-- I think most of us, when we say we have a fixed income, is using a hedge versus my stock or my equity portfolios. What you're saying is that I own government bonds, typically, which are guaranteed, of course, by whatever nation state that issued them through their central bank, and they're incredibly safe because governments have the ability to be able to tax.
Once you leave a government-guaranteed security-- and let's face it. We're talking about the US Treasurys, Canadian guarantees, the big European nations, Germany and France, the UK, and then, of course, looking at Japan, those are considered really safe government bonds.
But other fixed-income investments are corporate ones, and they come to a varying degrees of quality. So you can have an investment-grade bond, which is the highest rated and considered the most secure and safe bond. Then you kind of go down, like a capital stock, if you will, from there.
Basically, if you take a look at-- we'll probably circle the date March 19 of this year was the beginning of a very similar scenario that we saw in '08. Credit markets are something that basically flows based on money flows flowing in between it. And like '08, they stopped.
We were in the midst of a funding crisis, and that funding crisis had an impact on all bonds government. Like, you saw a US Treasury bond, for example, move from yielding 130 basis points down to 30 basis points, back up to 130 basis points in 72 hours, which is absolutely extraordinary, and that was due to unwinding of really leveraged investments out there based on government treasuries.
That unwinding moved into the corporate bond market. And so you could own very good investment-grade bonds that for a few weeks were really mispriced in a really terrible way. High yield-- you could have some quality high yield names that were also getting priced that way.
And so I think the way I sort of put it into context of this is that, when you look at your equity investments, there's an old famous saying that says, you only find out who's swimming naked when the tide goes out. And that means, all junky companies, in a great market, everything goes up.
Fixed income's the exact opposite. You only find out how you've done is when the tide comes back in. And so the difference in pricing that we've really seen here is that we're going to have to think about, as credit markets get healthy again and get the money flowing again, that's when you have to start looking at your fixed-income investments and really seeing how your non-guaranteed, your non-government guaranteed ones are doing.
And one of the things we opened up here today was about federal central bank policy. Last Thursday was just an incredible day for central bank policy for corporate bonds.
KIM PARLEE: I want to move on, if I can, to talk a bit about the banks because there's a lot of people who hold a lot of Canadian banks. What is this all going to mean for shares in Canadian banks?
Now, the number one favorite question by all Canadian investors-- what does this-- as Canadians, the banks are an incredible part of our lives for employing people, for mortgages and in housing and commercial real estate. And of course, it makes up so much of our index that there's an awful lot of memories, again, of going, well, gee, the last time I saw a debt crisis, which was '08 and '09, it had a really devastating impact on the price of bank stocks.
And so I think a lot of investors kind of immediately went back to that and said, uh oh, what is this going to mean for the companies that I own there? And I don't want to downplay this, but, in comparison to that time, very little. Since 2008 and '09, there have been an enormous amount of changes in the structure of banks and the type of business that they do, the type of leverage that they're being able to use.
And so looking at our own work, if I go over and look at the work of TD securities, we have a really good analyst group there. Their analysis of basically the whole Canadian bank sector is one that they're still in profoundly good shape and in an excellent position to be able to weather this environment.
The second question that most Canadian investors have is, oh, gee, what is it going to mean to my dividends? And to date, we think those dividends are pretty secure. And so we're not thinking that you're going to see a change in those any time soon.
And so the only byproduct, the warning, I would say, with that is that many Canadians, when they're building their investment portfolios, probably have too much allocation to that sector, and it might be wise to use this as an opportunity to take a look at your diversification and make sure that your portfolio isn't overweighted into that, because there's definitely is still a lot of headwinds for banks to be able to work through here in the coming quarters.
All right, Brad, I've got two important questions and only a couple of minutes. So let me get them at you rapid fire-- immediate and long-term impact of the oil deal between Saudi Arabia and Russia, which the market's just basically shrugged off.
Yeah. The immediate is very little. 9.8 new barrels have taken that out of the market and when we have-- absolutely inventories are full. There's nowhere to store the stuff. And then the flip side of that is there's almost no demand.
And so in the short term, I mean, I give you an incredible stat of-- looking in Europe right now, it's estimated that CO2 emissions are down 60% right now, and that's because there's just so little automobile traffic, and that's going to take a while to be able to work through.
Let's say you get out 3/4. I think you start to see that inventory gets worked through a little bit, and it can probably be tough times for oil prices here in the near term. You start getting out about eight months out, I think you could see it higher than where it is from here, for sure.
Last question and I think the one that most people are focused on-- have we found the bottom?
Well, I think that's the magic question we all want to know, and so I think-- I'm going to try to look at it in a couple different ways. One that folks really like to consider is technical analysis. We've had this big drop. Typically when you're at the end of a bear market, you have these two big lows.
I'm not a big believer in technical analysis, and I think in this scenario it's highly unlikely that we would have the second drop, and that is just because there is so much monetary and fiscal support going into this economy right now, which it's filtering its way into the market. So I would say that's going to make that kind of double bottom incredibly difficult.
The second part is that I think what we want to see and we're starting to see a lot of-- typically, bear markets come to an end when public companies come out and stop revising their earnings per share downwards. I mean, we do it in a really aggressive way.
We're starting to see some of that, but we have a bunch of that to go. So I think that once we start to see that work its way out, I think that's going to start to be able to tell the tale of the tape.
And then, of course, then the last one, which I think could get us override given-- the overriding factor in this is, with this COVID-19, when do we start seeing new cases stop, decline, and we start to see it work our way backwards? That's really when we're going to see that end. But it's hard to see that this market goes back to the lows that we've already seen.
Brad, thanks very much.
Thank you.
