People hate economic uncertainty, but more so when it’s paired with market complacency. As a result, there are a lot of smart people thinking that we’re about to get another correction, but this really isn’t that uncommon during a time of crisis.
Take the current one: the world stood on an empty shore wondering why the water went out when an earthquake of a virus hit China back in January, only to be followed by an economic tsunami of epic proportions. It is perfectly natural that many are now expecting another wave to hit the markets.
Without downplaying the seriousness of the damage being caused and those impacted, it helps to acknowledge one’s fears immediately following such an event and how it can influence your expectations that more trouble is ahead.
The global economy will recover from the damage wrought by this pandemic, but it will certainly not look the same as before. Tsunamis tend to permanently change the landscape.
This period of isolation we’re all in has facilitated a massive transition from the old world economy to the new world at an incredible pace
One can see this change in the S&P 500, as five stocks, Facebook Inc., Alphabet Inc., Amazon.com Inc, Apple Inc. and Microsoft Corp. now account for half of the entire index. In Canada, Shopify Inc. has become the second-most valuable company by market capitalization.
Many are questioning the sustainability of these reallocations of investor capital when they should be looking at the potential impact on other companies who are refusing to adapt to the new reality and seeking instead for taxpayer money to bail them out.
This period of isolation we’re all in has facilitated a massive transition from the old world economy to the new world at an incredible pace. Suddenly, older generations have no choice but to go online when it comes to buying groceries, doing their banking, watching movies or communicating with friends and family.
Entire ecosystems are rapidly expanding like never before thanks to strategies that take advantage of the millions of people forced to stay home. Video games such as Fortnite are hosting concerts with more than 12 million people attending. Netflix Inc. added 15.8 million subscribers in the first quarter, crushing its own forecast of seven million and analyst expectations of 8.47 million.
In retail, Target Corp. reported its digital sales have more than doubled in March and nearly tripled in April. Amazon Prime’s U.S. membership alone has grown to 118 million members at the end of March, according to Consumer Intelligence Research Partners estimates. This growth seems astounding, especially considering that most are paying US$12.99 per month to get access to free and timely shipping on purchases, and an entertainment streaming service.
All of this isn’t good news for the traditional price takers that unfortunately still dominate large swaths of the global economy. Here in Canada, we’ve gone all-in on these old-world segments of the market such as oil and real estate. As a result, we now have to worry about negative front-end oil prices and a real estate market that could be under serious duress should this period of isolation continue in the months to come.
The Canadian economy is also dominated by oligopolies in banking, transportation and telecommunications hiding behind government regulations to prevent competition when they should be trying to convert their local customer base into an online ecosystem, as well as build and expand it outside Canada.
Until this happens, the damage done at home will be greater than that south of the border or other jurisdictions embracing the shift in consumer behaviour. Investors, instead of worrying about whether a second pandemic-related wave will hit, should perhaps focus on how the first one will change the current landscape, especially here in Canada. Then adjust their portfolios accordingly.
A great starting point is to start looking at the rebuild, instead of the carnage washing up on the shore.
Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.) a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.