Too fast, too furious: Equity strategists warn on Canada streak

Bounce from March lows may be short-lived

It’s a feat even the U.S. market hasn’t achieved. Canadian stocks have risen for six straight weeks — and now equity strategists are calling time.

Some say the S&P/TSX Composite Index’s 36-percent rally from a March low should be seen as a natural market bounce, after a ferocious drop in reaction to the economic damage of the COVID-19 pandemic.

“The strength of the April rally was a function of how violent the sell-off was in March,” Greg Taylor, chief investment officer at Purpose Investments, said by phone. “So given how much March was a disaster, we had to expect some sort of bounce coming out of it and that’s what April really was.”

Thursday and Friday’s sessions were not pretty. The benchmark posted its biggest two-day slump since the March 23 low. That will stoke the debate on whether investors who’ve pushed up stock prices have appropriately accounted for a financial landscape utterly changed by the pandemic.

A sector rotation may have helped to extend the rally. What started off as a great run for gold miners and tech companies — Shopify Inc. passed $100 billion in market cap — has now faded with cyclical stocks taking over.

“The debate is whether that’s good news or bad,” Taylor said. “Because for the market rally to broaden out, you need other sectors to catch up and join in. But at the same time, in sector rotation, when the cyclicals and banks go, that’s usually the end of the rally.” One example of the powerful rally in cyclicals: Sea-Doo maker BRP Inc., which fell 61 per cent in the first quarter, has risen 68 per cent in the second.

Others say the data we’ve all been waiting for — economic growth, or lack thereof, and corporate profits — now point to a bleak picture investors can no longer ignore.

Canada officially entered a recession in the first quarter of 2020, according to the C.D. Howe Institute. The second quarter is certain to be worse, as millions of people have lost jobs or income due to measures that have closed stores, restaurants and other businesses. Most companies that have reported quarterly financials have cautioned that second-quarter figures will be worse. Some point to higher costs, other point to dire demand as consumers stay at home.

“Investors may find themselves increasingly vulnerable to disappointment in the near-term — particularly as there’s still plenty of bad news that needs to be absorbed on the economic and corporate earnings front,” said Candice Bangsund, portfolio manager of global asset allocation at Fiera Capital Corp. in Montreal.

For bulls emboldened by the possibility of economies reopening, watch out.

While the Canadian government has offered more than $70 billion in wage subsidies for business — as well as loans and assistance with rent — that doesn’t mean consumer demand will spring back once they open up again.

“As the reopening of the economy is likely to be both staggered and temperamental, setbacks on the road to recovery are probable and could potentially trigger some period bouts of volatility and risk aversion in the near-term,” Bangsund said.

Brian Belski is staying optimistic, adding that the stock market is traditionally six months ahead of the economy. Investors are too focused on risk and not the reward, the chief investment strategist of BMO Capital Markets said by phone.

The resiliency in Canada’s stock market can be seen in energy stocks that have bounced back despite the fear and volatility surrounding oil prices, he noted. “America and Canada are the best places in a bad neighbourhood,” he said.

“We are so focused on the negative, we are missing the positive.”