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This first article resulted from many interesting discussions and research on why the financial markets may be the way they are right now.
Personal Finance & the world, out of sync?
HAPPY 2021, as we hope everyone had a solid beginning to 2021.
How lucky are we to be in Western Canada?
As with everyone, our holidays were limited; yet found silver linings by making it a little more intimate and personal than perhaps holidays of the past. At times we almost forgot that we are living in a COVID-19 world. ‘Almost’ being a fleeting word – the daily health reports, the economy and the markets successfully reminded us that we are truly living in a time of pandemic. From a financial perspective, wherever you turn, the signs are there: yet the stock and real estate markets seem to be vastly out of sync with the stark economic reality of the pandemic world. As we explore this disconnect together, please note that the content below is a summary of valued feedback that has emerged over the last few months from several experts and commentators.
Wall Street, Bay Street and real estate vs. main street
At the beginning of the pandemic, most of us likely felt the uncertainty of business, and thus financial stress and dislocation as caused by COVID. Eventually individual/personal adjustments, as well as government programs helped – which were released at what seemed like a daily clip and then were often revamped later on. During this initial period, the stock market fell 35% or so, as one might have expected, and the housing market ground to a halt. However, after the initial drop off the cliff, the stock markets started a steady climb back to their January 1, 2020 levels and now with strong percentage gains above the January 2020 levels. Also, the housing market heated up with many buyers having to accept the fact that making offers above the asking price is a new normal, at least for now. The fly in the ointment, so to speak, is that there is a lack of RE inventory which makes every aspect of the industry more difficult despite the higher values that most sellers enjoy. Millions of people have received the Canada Emergency Response Benefit (CERB)and the Employment Insurance as somewhat tailed for the average Canadian financial realities.All while many small business owners are working just to break even or keep the lights on for better days. Employees across the country have been temporarily laid off or have lost their jobs. Why would a weakened economy have this kind of financial and housing market strength?
Over the years, the stock market has taught us that we usually cannot predict its direction. As a result, it is generally best to hold your portfolio and even buy when everyone is running for the exits. Yet COVID investing seemed different. While some of us were smart enough or bold enough to buy at the pandemic’s deepest lows in March, most people needed all their discipline not to liquidate their equity holdings in some part. As we all witnessed, the world’s economy came to a standstill and the economic destruction seemed like it would take years to overcome. So why did the markets turn on a dime and go bullish? Why have they showed no sign of flagging? Why do they continue to defy the larger economic trends? As always, opinions vary, yet here are the most interesting ones I have become aware of…
1. “Don’t fight the Fed.” It’s an American phrase referencing the Federal Reserve, but the point is valid in Canada too. The Bank of Canada (like the Fed) has provided an unprecedented liquidity injection to keep the market afloat.
2. Markets reflect a long-term view. They have discounted our current economic and social issues for an expected brighter future.
3. The markets have built in a vaccine discovery.
4. Interest rates are so low that you must be in equities or you will have a negative absolute return after inflation in GICs and T-bills.
5. The travel, entertainment and retail industries do not have a significant impact on many stock market indexes.
6. Technology and healthcare have flourished in many cases during COVID, and these sectors make up a significant portion of the U.S. indexes that many Canadians invest in. (On the Canadian exchanges, Shopify has also helped carry the Canadian market rebound.) The stock market recovery reflects the success of technology and healthcare - not the health of the larger economy.
7. The larger companies have hoards of cash to keep them afloat and take advantage of companies with lesser balance sheets.
8. Some people have flipped from being scared of being in the market to having a fear of missing out on the rebound.
And yes, while the market has soared, some experts warns that the market is in a bubble of historic proportions. So, keep in mind, these are unusual times, and the market can turn around and surprise us to the downside just as easy as it can continue to climb. Housing market
One would have thought that many people would hesitate to purchase real estate during COVID-19 due to the uncertainty of their jobs and the economy. Several experts as well as some clients seem to agree on the reasons below for a strong housing market.
Large shortages in the supply of homes and a relative abundance of buyers led to competition and bidding wars. On the supply side, many people just hunkered down and did not want to risk selling into a pandemic market.
1. Those who were fortunate to keep their jobs had fewer places to spend and decided in many cases to renovate and fix their current homes rather than purchase a new home, reducing supply.
2. Many people decided to purchase cottages rather than move to new city homes. If I can’t travel for vacation, people said, I want to have access to a cottage property. This is especially true while we still don’t know when COVID will recede and when we will see an effective vaccine. People staying in their homes reduced the inventory of homes for sale.
3. Interest rates are so low, so the cost of carrying a mortgage for the foreseeable future is extremely low and unlikely to change based on government economic policy.
4. People concluded working from home is going to be the new normal in some fashion. They realized the money they had saved to eventually buy a home in the city could be redeployed to purchase a home in the suburbs or in a more rural area. This led to a spike in many areas outside big cities. While this moderate exodus would theoretically soften prices in urban areas, the fact is that the fundamentals in those markets are strong enough to keep prices high. It should be noted that this exodus from the cities has reportedly caused some softening in the personal condominium market (Vancouver and NYC), as many of the people looking outside the large cities would have been condominium purchasers.
All this being said, it is worth differentiating between housing and other real estate subsectors. For example, the retail and larger commercial office building markets are seeing the “expected” drop in demand given COVID, due to the loss of foot traffic and employees being told to work from home.
On the other hand, in the industrial sector, the massive growth in online ordering has increased the need for space to accommodate logistics and warehousing. So, is the financial world out of sync?
Personally,I feel the answer is still at least a lukewarm yes, if you like me feel there is or should be some kind of direct correlation between the economy and the stock and real estate markets. We shall see in another year or two whether the stock and real estate markets got ahead of themselves, or whether this was just the first phase of even stronger markets. Interesting times either way.