Fireside Conversations- What to make of 2020 so far, and what comes next?


The following is a conversation with a hypothetical client

Client- It has been a wild year; we are still battling through the COVID pandemic and the related economic fallout from the lockdowns. What are your thoughts on 2020 so far?

McCulloch & Partners- Without question, the speed of the recovery in equity markets has been incredible to witness, it is important to put some context on the headlines. What marked the turnaround in markets at the end of March was the quick and massive stimulus by central banks and governments around the world, led by the Fed. Some reports out of the US have tallied the amount of stimulus at around two times the nominal value of lost GDP.

We expect central banks to remain accommodative over the next 2-5 years. This is evidenced by their policy announcement recently where they shifted their inflation targeting regime moving forward, potentially allowing inflation to run above their target before they look to raise rates. We as a society will need to figure how to pay for all of this stimulus at some point, but that is likely the subject of a future discussion, as the patient is still ill and treatment is needed.

It is important to remember that equity markets are inherently forward looking. As such, during most recessionary periods, financial markets begin to recover before the economic data does. With that said, while equity markets globally have recovered from the steep March selloff, it is the US equity indices that have broken out to new highs. This exemplifies a major trend that has taken hold of 2020, that being a large dispersion between “winners” and “losers”.

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As can be seen in the charts above, US equities have led the charge back from the March lows, with the technology heavy Nasdaq leading they way. From a sector view, again we see a broad dispersion between winning sectors and losing sectors, with technology and communication services leading the way. There is no question, one of the key takeaways from 2020 will be the pull forward of demand in trends that have been gaining traction in the last few years. Areas like mobile connectivity, work from home, cybersecurity, the importance of the cloud and online retail have all been strong winners during this year, and their adoption into the society has sped up. What is now important to determine is if this demand has simply been pulled forward from the future, meaning that the growth of these companies will be challenged moving forward, or if the increased adoption is a permanent shift in the demand curve for these businesses, and increased their addressable markets.

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However, even though the topline index numbers look ok, deeper analysis reveals a less rosy picture. The median year to date return for a company in the S&P 500 this year is -6.5% at the time of writing. So while the S&P index looks like it is having a strong year given the economic reality currently being faced, it is being dominated and led by a few of the largest companies in the index, which just so happen to be businesses that have seen less impact to their business as a result of the pandemic. The majority of companies that make up this index are not positive year to date. The chart below breaks out year to date returns of Facebook, Apple, Amazon, Microsoft, and Google, and the remaining 495 companies in the S&P to further illustrate this point.

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The results are quite sobering, showing that most companies are experiencing a year that may be more reflective of what we are experiencing in our everyday economy. Long story short, the topline numbers for equity markets are being skewed by a few of the largest companies in the world, particularly in the US, and the reality is that the majority of companies are have had to weather the storm caused by COVID. We are certainly seeing some examples of FOMO (fear of missing out) in pockets of the market right now, we want to see some broader market leadership moving forward to sustain this rally. We saw some signs of this occurring in August, which is good news.

If you believe in science to develop a functional vaccine in short order and in the Fed stimulus being successful in managing the economic fallout then we could see a large rotation and upswing in the “re-open stocks”, cyclicals, industrials, value and small cap equities that have underperformed this year. A vaccine would give the market a healthy dose of optimism and further upside returns in those areas of the market especially.

Client- Why are US equity markets leading the way? The situation south of the border in relation to the number of COVID cases and deaths seems to be amongst the worst globally?

McCulloch & Partners- A lot of the answer to this question lies in what we just discussed, namely that the main beneficiaries during this pandemic were large global businesses with strong technology platforms. The US economic system, while not perfect, has enabled a dynamic environment for innovation and technological advancement. As such, many of the largest companies in the world in the technology and communication services sectors, are American. As such, capital has flowed into these businesses, resulting in the US outperformance. So while it may be odd to see the juxtaposition between US equity markets and how COVID has affected the US, it makes more sense when considering the global platform companies that dominate the US equity markets and how their businesses have handled the pandemic.

Client- Does the upcoming election in the United States in November pose a threat to US market leadership?

McCulloch & Partners- We have certainly begun to see the focus of mainstream financial media outlets pivot from pandemic coverage and analysis to focus on the upcoming election between President Donald Trump and Democratic nominee Joe Biden. The simplified answer to that question is that it could pose a threat, however more nuance is required when thinking about politics and financial markets. It is important to remember that campaign platforms are easy to develop and speak to, however, implementation once in office is usually far more subtle. That said, we are beginning to get enough information, particularly from Joe Biden, to formulate an outline of the broad focuses should the White House go to the Democrats.

In a nutshell, Democrats are looking at higher taxes on wealthy individuals and corporations, a significant reform to public health care, a big hike in the minimum wage, and a huge spending spree on infrastructure and clean energy projects. As with many potential changes that would impact financial markets, there is always more to consider then just the first order effect. So for example, while we would view a rollback of the tax cuts enacted by President Trump as a negative headwind for equities earnings profile and prices, coupled with a major fiscal spending program on infrastructure and clean energy that would likely be a boost for aggregate demand, would have an undetermined net effect on equities.

We do see areas where we have seen overlap from both Democrats and President Trump. Infrastructure and China appear at the top of that list. We have long posited that globally, need for increased infrastructure spending of all kinds is needed, whether to increase quality of life in emerging economies such as India, or upgrading roads, cell towers, energy supply in developed economies such as Canada and the US. Infrastructure continues to be a core theme for our portfolios and will remain so regardless of who wins the US election in November. An area of infrastructure that has gained increased importance globally, is renewables and clean energy. There is a concentrated push by governments around the world, mainly in the developed economies, to continue to push the transition to more clean and renewable sources of energy and output. A Biden win would see the US join that train in a big way.

Another area of overlap is China. While their approaches would likely differ substantially, many of the core complaints the President has levied on China are shared by both sides of the political spectrum. This ties into big tech and how President Trump or Biden would treat these companies, and speculation of either president looking to break up these major corporations while the major technology companies of China continued to grow unchecked appear unlikely.

However, we have put together a quick snapshot compiling our viewpoints as well as from macroeconomic research reports on the topic of US technology under either administration. Regardless of who wins the election, the tensions between the US and China (Cold War 2) looks set to continue.

Proposal/ Policy Stance

Candidate/ Administration

Impact On Tech And Related Sub-Groups


Expand access to broadband


Positive for network equipment companies and cell-tower REITs. Modest positive for internet service providers (ISPs) such as telecom and cable carriers.

A priority for both political parties as COVID-19 has reinforced the need to close the digital divide.

Reinstate net neutrality


Potentially negative for ISPs.

Enforcement of net neutrality by the FCC will be subject to legal challenges by ISPs.

Data privacy laws


Negative for internet platform companies, although the impact of higher compliance costs will likely be manageable.

Enjoys bipartisan support, but there are disagreements about how to proceed.

Repeal Section 230


Negative for internet platform companies.

Requires an act of Congress. Significant changes to the law will face judicial scrutiny.

Anti-trust investigations


Potential negative overhang for companies being probed (i.e. Apple, Amazon, Alphabet, and Facebook).

Supported by both Republicans and Democrats, but any push to break up Big Tech is likely to be a difficult and drawn out affair.

U.S./China tech cold war


Negative for the broad IT sector, especially if the world splinters into competing global tech standards. Semiconductor and tech hardware companies face the greatest risks.

Trump will continue to encourage U.S./China decoupling. The tough stance against China is unlikely to materially change under a Biden Administration.

Client- How has Canada weathered the pandemic?

McCulloch & Partners- Canada, like many other countries, inflicted large economic damage through the lockdown response to the virus, and attempted to offset this damage with a large dose of accommodative policy and stimulus. Prime Minister Trudeau is set to unveil his new platform towards to end of September, and there is a chance that it could result in calls for a nonconfidence vote in the minority government and a new round of elections. We would expect the proposed agenda that leans to the left and brings elements of demands from the NDP to try and get the votes needed to pass.

In the meantime, Canada is attempting to claw back from the massive output drop due to the pandemic and lockdown response. Canadian financials have weathered the turmoil well so far, however it will be worth watching default and deferral levels in the next few months as regulators roll back some of the special rules allowing banks to account for these deferrals are phased out as the recovery continues.

While Canadian equities have underperformed their US counterparts, we have seen an increase in the value of the Canadian dollar relative to the US dollar, recovering from a low of $.6891 in March to about $.7665 at the end of August, a rise of over 11%. For unhedged Canadian investors, this has offset some of the gains experienced by their US equities. For Canadian exporters to the US, this makes their products more expensive, and hurts competitiveness, an undesirable outcome when trying to stage an economic recovery.

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Client- What are you watching moving forward for the rest of 2020 and into 2021?

McCulloch & Partners- Well, we are of course watching how the US election cycle unfolds, both at the Presidential level, but possibly more importantly, at the US Senate level. Should we see Democrats take control of the Senate and the White House, their ability to deliver on their platform will increase. A sweep by democrats, accompanied by a massive fiscal spending platform and low interest rates, would look to be inflationary in the medium to long term.

In the face of inflationary forces, we would expect real assets such as gold, and businesses that have pricing power and the ability to pass through inflationary pressures onto consumers as good hedges against inflation. At this point, it seems that should we see a return in aggregate demand, there is the potential for inflation risk to the upside.

We continue to monitor how the economic recoveries globally unfold, as well as how the transition into the winter flu season could impact the path of COVID cases globally and how governments react. It is important to note how the various vaccines currently in late stage testing proceed, as they could dramatically change the narrative with respect to the COVID pandemic. A successful vaccine potentially unleashing a wave of pent up demand on travel, leisure, and consumption.

Rapid government response to the outbreak with respect to monetary policy, additional benefits and loans to businesses in need have assisted in dampening the full blow to businesses and individuals associated with the magnitude of the GDP declines witnesses in the second quarter. We have seen some reports in the US where the aggregate stimulus deployed by the government to combat the pandemic induced recession far exceeded the economic declines.

Ultimately, this is a band aid and to truly recover we need to see economies around the world stand on their own two feet again coming out of this recession, and a functional testing and vaccination program would look to be an important step in restoring confidence in businesses and individuals. Global growth really does depend on a widespread vaccine program across the globe. To that end, there are promising vaccines in later stages of development, and early potential distribution by the fourth quarter of this year.

The portfolios continue to be designed to take advantage of areas we favour; such as certain areas of technology (cybersecurity, mobile payments, robotics and AI), renewables, infrastructure, financials, telecommunications and other sectors and high quality companies to name a few, with an eye to managing risk at all times. We believe that science will ultimately bring a vaccine and better testing capabilities, governments and central banks stimulus programs will be biased towards easy policies for years to come and we will get back to reopening and global growth in the years ahead. We are entering a period (September/October) that historically has seen increased volatility, and we expect that to persist through the election cycle. We could easily see a contraction phase especially in the high-flying technology sector. Future issues will address how will we pay for all of this mounting debt and stimulus programs.


All data and/or charts are sourced to Thompson Reuters Eikon unless otherwise noted.


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