This week was the first time since the COVID-19 crisis began that analysts provided some preliminary thoughts as to where they believe the US economy may be headed for the balance of the year. The current consensus with respect to timeframe is for a total of two months of lockdown. A lessening of restrictions and re-emergence in May. Followed by two months of economic restart. This consensus view would result in a big decline in GDP in Q2 (the shutdown), a bounce in Q3 (the restart) and an acceleration to above average growth in Q4 (the stimulus). If correct, the US would record a recession in 2020 with GDP falling approximately 3% (2019 +2.3%) and see above trend growth in 2021 (+3.5%) as government stimulus and renewed confidence continues to build. If this were to be the case, with a favourable outcome in the control of COVID-19 and a positive turn in global economic indicators, US equities should break out in Q4 after trading in a range over the next six months.
For Canada, we would expect a similar pattern – a terrible first half followed by a bounce in the second half of the year. The magnitude of the bounce and the sustainability of momentum into 2021, however, is a bigger problem for Canada. During the 2008/2009 Great Financial Recession (“GFR”) US consumers retrenched and de-levered as the housing market cratered. As a result, US consumers now have a respectable household debt to disposable income ratio of 88.5% – down from over 120% at the time of the GFR. Less debt to disposable income means that US households can take advantage of easy credit and ultra-low interest rates to get the US domestic economy going. Canadian consumers, on the other hand, didn’t have a housing crisis and took advantage of the low interest rates following the GFR to pile on mortgage debt. As a result, Canadian consumers (the biggest contributor to economic growth) have a staggering household debt to disposable income ratio of 176% – an all-time high. With the Canadian consumer already in a lot of debt, there is little room for consumption expansion to boost the Canadian economy. Consequently, the outlook for Canadian domestic economic growth and by extension, Canadian equities, is less favourable than the US.
Despite the extraordinary events of the past six weeks, our overall strategic portfolio view remains the same – global equities continue to be more attractive than global bonds for balanced portfolios. US equities should maintain their dominant position. European and Asian large cap equities should also recover well with the support of massive regional fiscal policy. We expect weakness in the Canadian dollar against its US counterpart, which could help Canadian dollar portfolios breakeven or achieve a slightly positive return for 2020. Market volatility will remain a prominent feature of the current investment climate.