Making sense of the markets this week: November 16

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. 

The stock markets cheer the vaccine news from Pfizer

Pfizer’s vaccine announcement is certainly the big story of the week, just as the U.S. election was the story last week. 

On Monday, Nov. 9, U.S. pharmaceutical company Pfizer announced that their COVID-19 vaccine is 90% effective. That is, the study showed the vaccine was able to stop 90% of infections. That efficacy rate is far superior to the expectation that a vaccine might only be 50% to 60% effective, and it led to incredible optimism in that we might have one of the solutions to help us get to the other side of the pandemic. There’s hope that we might get life back to “more normal.” 

On stock markets around the world, nearly $2 trillion traded on the positive COVID vaccine news. 

Canadian stocks soared on Monday, increasing by 2.7% at one point midday, before settling for the day with a 1.2% gain. The gains were led by the hard-hit financials, REITs and energy stocks. The gains continued into Tuesday and Wednesday with the TSX Composite up 3% after the close on Wednesday. 

The S&P 500 in the U.S. was up 2%, while developed markets were up 4.7% after the close on Wednesday. Emerging market indices were flat for the same period. 

The great stock rotation

Many analysts and fund managers have been anticipating the great stock rotation for many months. As we have discussed in this space many times, stay-at-home stocks have been driving stock market returns. The great rotation would mean that more monies will be directed to those hard hit sectors, where companies were forced to close or operate at reduced capacity. That includes airlines and cruise lines, hospitality (hotels, resorts and casinos), mall and office REITS, plus the dine-in restaurant sector. 

And with the potential for widespread economic growth, financials, energy and other cyclical sectors could see better times ahead. 

Here’s how the sectors performed on Monday. We see evidence of that great rotation: 

But many also suggest, let’s not get carried away. We might curb our enthusiasm. Cruise-line stocks such as Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. each closed with single-day gains above 25%. We saw some of the biggest losers become some of the biggest winners. Yet it may be a year or two or more before we are lining up for the buffet table on a Caribbean cruise, or flying around the world with regularity. 

Yes, the vaccine announcement from Pfizer is wonderful news. But there is more to learn about its effectiveness, the risks and the ability to distribute the vaccine (and other successful vaccines) across North America and around the globe. 

We might have some cautious optimism as investors, and more importantly as societies struggling through the first modern pandemic. But this is certainly wonderful news. I’ve been waiting to be able to share this post from March when I declared that I believe in the human spirit. I offered … 

“Why will our economy eventually recover and thrive? The human spirit is strong, relentless and undefeatable.We will ‘defeat’ the coronavirus known as COVID-19. We will win the economic war.”

While we are still in the heat of battle, I certainly feel that this week’s news offers a glimpse of how we eventually look to and get to the other side of the pandemic. We might be allowed to enjoy some optimism. 

High yield Canadian dividend stocks are making a comeback

When we made sense of the markets for the week of November 2, a subhead read:

Big, juicy Canadian dividend stocks are on sale

The Canadian high-yield dividend index offered a very generous yield at the time of that post, and as demonstrated by many stocks. From November 2…

“If we look at some of the high-dividend individual stocks, we see some incredibly large dividends as well. Both Capital Power and Power Corporation of Canada have yields of 6.7%. BCE Inc. and Manulife Financial Corp. have yields of 6% each. Enbridge Inc.‘s dividend yield is 8.6%, while TC Energy (another pipeline) offers 6%. On the Canadian banking front, Scotiabank is yielding 6.6%, TD is at 5.4%, and CIBC will deliver a 6% annual yield.” 

Thanks to the positive vaccine news from Pfizer and the prospects of more widespread economic growth, the financials and energy and communications stocks have seen a nice move to the upside this week. 

Scotiabank was up over 9% from Monday to end of day Wednesday. BCE was up 6.5%, while Enbridge moved up over 11% for the period. Power Corporation of Canada was up 6.5%. The big Canadian dividend stocks are closing the gap with the TSX Composite. iShares TSX Composite High Dividend ETF (XEI) was up 9.4%. In comparison the TSX Composite was up less than 3% from Monday to Wednesday. 

We’ll keep a watch on this trend. I will also keep an eye on those Canadian cannabis stocks and ETFs. Joe Biden is seen as a cannabis-friendly president and more States in the U.S. have legalized the recreational use of cannabis. 

Horizons Marijuana Life Sciences Index ETF (HMMJ) is up 25% in November. 

TD will not finance oil and gas projects

Once again, we are seeing more evidence of the green shift with respect to corporate policy. 

Many companies are voluntarily seeking to be better corporate citizens and to “go green.” And that includes some of the big Canadian banks. 

The Globe and Mail reported that TD Bank will not finance arctic oil and gas projects. And TD is not alone in that shift. From that post… 

“Last month, Royal Bank of Canada became the first Canadian bank to say it will not directly finance exploration or development in the Arctic National Wildlife Refuge. RBC also said it will limit financing for clients with significant coal-mining operations.”

On many investment sites, such as Morningstar, you will see an ESG (environment, social and corporate governance) rating factor. 

More individual investors and professional money managers continue to factor those ESG ratings into investment decisions. 

Bond yields also move higher with vaccine news

This week we also saw a vaccine-inspired rise in bond yields. Investors moved out of many long term bonds, moving those yields higher. The prospect of a vaccine-fuelled economic rebound could prompt portfolio managers to further decrease their bond exposure. As you may know, when bond yields increase, bond prices fall. There is an inverse relationship. 

Bonds are still an integral part of a balanced portfolio as they can counterbalance the stock market risks. But we should also remember that bonds change in price as well, so they aren’t without risk altogether. That said, if rates continue to increase you will be able to purchase bond funds delivering a greater yield. There is that upside. While you will be taking a hit on the bond fund prices (and total value) you’ll be able to boost the yield contribution from the bond component. 

Most importantly, and as always, those bonds are in the portfolio for the potential to go up in price when stocks go down. Longer term government bonds typically are the better bonds for managing the stock market risks. 

Mortgage rates to go along for the ride?

Many feel that mortgage rate increases could be in the cards as well. Mortgage lenders tie their rates to Treasury bond rates. 

Good news can be bad news for borrowers. From that CBC Business article… 

“But the good news that a vaccine seems to be within reach—and with it, a return to normal life and a healthy economy—is a timely reminder that bad news, and the historically low interest rates it affords, cannot not last forever. This may also be a good time for Canadians to consider what a victory over COVID-19 will mean for the rates they will have to pay.”

What does that mean for borrowers? One of the main considerations when obtaining a mortgage is the decision of a fixed rate mortgage versus a variable rate mortgage. 

Here’s a chart courtesy of ratehub.ca. The variable rate is in red; the 5-year fixed rate is in blue. 

Keep in mind that a floating variable rate mortgage historically is the best option over most periods. It’s not a given that rates have nowhere to go but up, but you might factor in that risk of a rising rate environment. 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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