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Stéphane Girard
MBA, CIM®, Fin. Pl.

Investment Specialist, Products Knowledge

Just like in the movies

The year 2020 will certainly be remembered for the extraordinary combination of unique events that marked it. A historic pandemic, a chaotic political situation, dramatic reversals, we seem to be in an epic movie where no one knows how it will end…

Back to basics

2020 will also have turned out to be a big stage on which many key investment principles were deployed and validated. Today we offer you a slightly more technical approach to one of these principles, the desynchronization between the stock markets and the real economy.

Rowing against the tide

During the year, the superior returns generated by the various indices seemed out of step with the economic situation. Many companies, especially in the service sector, had to halt their activities and lay off their employees. The unemployment rate skyrocketed. Many retail businesses, particularly mom-and-pop shops and businesses, also had to shut down. Unfortunately, many will never reopen.

In this environment, why have the North American stock markets generated returns of 5.6% in Canada and 16.3% in the United States (in Canadian dollars)?

Listed or not

First, you should know that more regional businesses and local shops are generally not listed on the stock exchange. They therefore have a limited impact on the performance of the stock index, although their closure can cause considerable shock waves in the real economy.

Different sectors, different impacts

Another aspect that explains this dichotomy lies in the sector composition of stock market indices and the economy. The table shows the weighting of each of the sectors that make up the U.S. S&P 500 stock index, as well as their impact on the country’s gross domestic product (GDP). You will note that there are sometimes considerable differences.

A tech year

In 2020, technology was by far the best performing stock market sector. As you can see from the table, tech companies make up about 23% of the entire S&P 500 Index. However, they generate only 7% of GDP. In contrast, companies in the industrial sector account for nearly a quarter of U.S. economic activity, but only 9% of the index.

The key point here is that the pandemic weighed heavily on companies in the industrial sector, which had a crucial impact on the economy, but much less of an effect on the stock markets. Conversely, sectors such as technology saw spectacular stock market gains in 2020, with no equivalent economic impact.

Expected profits already discounted

To make sense of this paradox, you have to understand the very nature of stock markets, which can be defined as expectation markets. Thousands of analysts and portfolio managers around the world are constantly scrutinizing the investment world to try to anticipate future moves and be well positioned when they occur.

Historically, stock markets have always been six to nine months ahead of the real economy. If an investor waits to read good news about the economy on their tablet before investing, it’s almost certain that this information will already be discounted in the stock prices. So he has already missed the good opportunity.

Closer to home, the markets did not wait for positive announcements such as the discovery of a vaccine before starting to rally: they looked beyond the health crisis to position themselves long before the recovery.

Return of savings

All of this explains why the stock markets have performed so well when the economy was sluggish. For its part, government financial assistance has improved the situation.

On balance, this tumultuous year had as a direct consequence an increase in the savings rate of Canadian and American households. Due to the prevailing financial uncertainty, people decided to invest their money rather than spend it. Another factor that favours the markets to the detriment of the economy! So the blockbuster movie of 2020, despite all its twists, could still have a happy ending in 2021!

Have questions about this article or your portfolio? Contact your advisor, who will be pleased to help you.

Stéphane Girard, MBA, CIM®, Fin. Pl.
Investment Specialist, Products Knowledge


The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.

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