We had another phenomenal month in August with the US S&P 500 up 7.0%, the NASDAQ up 9.6% and US industrials were up 8.5% and adjusted for USDCAD currency changes US industrials was up 5.8%. The Canadian TSX was up 2.1% in August. My preference for the US has been a positive this month as I view the financial and resource heavy TSX to lag for some time because Canadian consumers have not faced the high levels of debt and I don’t foresee a resource boom in the near future. These two factors will likely weigh on the TSX for some time to come.

In this newsletter I look at the quantitative side of back to school sales and its overall effect on retail sales.

A survey of US retailers forecast that back to school sales will be down 20% this year. While this number seems high in isolation we need to put it against a backdrop that back to school sales are only 15% of overall retail sales. That means that they are only expecting a 3% drop in retail sales overall attributed to the school year. If other parts of shopping hold up okay and back to school sales returns to normal next year then the market is likely to look past this and see it as an outlier and not a reflection of the overall trend going forward. The markets are a forward looking mechanism and are always trying to gauge the future.

People often wonder about valuations and think that the current levels in the market are likely overbought in the short term. I also think that the ultra low interest rates, government stimulus and ability for a publicly traded company to evolve quickly are all benefits that would lead the market to a recovery well before the consumer does. Keep this in mind as tech stocks are selling off pretty good in the beginning of September.

***The following was written prior to Septembers sell-off*** I do think that we are due for a correction at some point in the next year and it will likely be quick. I do not think that the world will come to a complete stop and that we will have to ride this one out.

With schools reopening this month, the possibility of schools being shut down again and the concern about parents staying at home: to look after and educate their children all add uncertainty to the markets. Plus the greater the number of parents that stay at home to look after their children, the greater the number of people who will not be in the workforce. Perhaps some of these people will be able to manage a full time or part time job while also caring for their children. I for one am not and look for help. In York Region where my kids go to school we were notified that 33% of elementary school children will be participating in distance learning and not be physically at the school. That sounds incredibly high and I would like to know what the percentage is by grade. It may be children primarily in higher grades who are able to operate more independently which may allow a family to work and also help educate their children.

There have always been challenges and people will get scared. I believe that the valuation of the markets is fairly valued as many Canadian financials and telecom stocks are still down double digits from the start of 2020. I expect there to be a rotation among sectors to more cyclical names as we get back to work and find a way to coexist with this virus.

I do not expect a complete shutdown of our economy like we had in the March. People, governments, nor our fiscal budget have the appetite for it. What I do expect is, rather than something like an electricity blackout, I expect potential shutdowns to be more like a brownout. I believe that certain high touchpoint industries will need to be shut down periodically however they will reopen. I believe that the majority and broader part of the economy will continue to stay open and function.

I believe that we will push to open up and as it gets tougher for the individual for their pocketbook they will work harder to find ways to get back to work. When a human’s back is against the wall we have no choice but to fight and our survival instinct sets in.

Some will look for others to save them but many will quickly realize that no one is coming to save them. We will be forced to find ways to become more profitable and make money.

The markets are a reflection of that survival instinct.

Until next time,

Trevor Dale, CFA


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