Oct. 26-30, 2020

What happened last week

COVID-19, stalled stimulus, and economic data sent markets on a wild ride

In the final week of trading before the U.S. presidential election, with investors already expecting an increase in volatility, familiar stories continued to eclipse the race for America’s top political job. These included the rising cases of coronavirus as well as the fight over a new financial-stimulus package. The result was the biggest weekly rout since March.

The presidential race between incumbent Donald Trump and challenger Joe Biden certainly made headlines, but – at the financial level – heavy declines also hit the market throughout the week, starting on Monday. The greatest cause of investor trepidation was the report of record numbers of new coronavirus cases in the U.S. and France, and what that would mean for their respective economies. On that same day, Spain, Russia and Italy all reported alarming spikes in new cases. The result, which factored in the lack of progress on a new U.S. financial-stimulus package, was an across-the-board decline for the North American benchmark indexes. The Dow Jones Industrial Average, which was down more than 900 points mid-day, fared the worst; it dropped 2.29%.

The slide continued into Wednesday, when France and Germany – the European Union’s two largest economies – imposed new, month-long partial lockdowns in efforts to contain the spread of the virus. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq all fell 3%, which was the largest loss for U.S. stocks in four months. Canada’s TSX, which also declined, was dragged down by energy stocks, as the price for oil plummeted 5.6%. Overall, it was the biggest daily percentage loss for oil since Sept. 8. In addition to increasing stockpile of crude, fear remains that demand will dry up if the pandemic worsens.

U.S. Gross Domestic Product (GDP) and corporate earnings provided some hope

Markets bounced back on Thursday, with investors finding optimism in America’s Q3 GDP results: according to the U.S. Department of Commerce, the GDP grew at a seasonally adjusted, annualized rate of 33.1%. With businesses reopening, consumer spending jumped 40.7%. This overall growth was much needed, especially after the economy contracted 31.4% in the second quarter. On a year-over-year basis, the U.S. GDP was up 7.4%.

o On Thursday, supporting the economic data, came corporate earnings from Facebook, Apple, Amazon and Google’s parent company, Alphabet Inc. All four tech giants beat analysts’ expectations and reported record quarterly revenue. The momentum wouldn’t last, however, with volatility returning to markets on Friday.

The Bank of Canada held its benchmark interest rate steady

On Wednesday, Canada’s central bank announced plans to hold its key overnight interest rate at 0.25% – something it plans to do for several more years to support economic recovery. The bank said that it would like to see the inflation rate reach 2% (which, it believes, is unlikely until 2023), before making further considerations. In its report, the bank also stated that it expects the economy to shrink by 5.7% this year, followed by growth of 4.2% and 3.7% in the next two years, respectively. The bank confirmed its continued commitment to buying government bonds to help offset long-term borrowing costs.

In remarks to reporters, Bank of Canada Governor Tiff Macklem summed it up this way: “Our main message today is that it will take quite some time for the economy to fully recover from the COVID-19 pandemic. The Bank of Canada will keep providing monetary stimulus to support the economy through the recovery.”

In related economic news, on Friday Statistics Canada reported Canadian GDP was up 1.2% in August, the fourth straight month of growth.

The stock and bond market*
S&P/TSX Composite 15,580.64 -4.44% -8.69%
Dow Jones Industrial Avg. 26,501.60 -6.47% -7.14%
S&P 500 Index 3,269.96 -5.64% 1.21%
NASDAQ Composite 10,911.59 -5.51% 21.61%
10-yr GoC Yield 0.66% 0.02% -1.04%
10-yr U.S. Treasury Yield 0.88% 0.03% -1.04%
WTI Crude Oil (US$/bbl) 35.72 -10.36% -41.63%
Canadian Dollar US$0.7509 -1.33% -2.47%
Bank of Canada Prime Rate 2.45%

*Weekly performance ending October 30, 2020. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.

What’s ahead

U.S. presidential election: Tuesday, Nov. 3 is election day in the U.S., and the future direction of the world’s largest economy is at stake. When an official election result is reached, the outcome will impact countries around the globe. For information on what the result could mean for Canadians and their investments* – and for other resources, commentary and news – visit Market View.

Circle these dates

  • Nov. 11: Remembrance Day (Canadian bond market closed)
  • Nov. 26: U.S. Thanksgiving (U.S. markets closed)

Key take-away

Over the long term, the market goes up. That’s easy to lose sight of when markets tumble, like they did at various times this week. But, periods of uncertainty have happened before, and history consistently shows us that markets recover. Having an investment plan that is geared towards your individual goals and objectives – and sticking to it – is the best defense against inevitable market downturns.

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