Amidst the ups and what seems like mostly downs of the past year, there is light shining from the North. Despite the difficult circumstances we have faced in 2020, there have been bright spots to build optimism for the year ahead.
Unlike previous recessions, the economic effects of the pandemic have been uneven and concentrated to certain sectors. This has resulted in a relatively weak multiplier effect for the overall economy. Sectors that have been able to thrive during the pandemic, such as technology, have helped to drive equity markets, as largely seen south of the border. Canadian equity markets, generally influenced by the energy and resources sectors, have been hindered by lower demand due to the slowdown. In response, many companies have reassessed their business models, cut costs and leaned operations.
After the spring shutdowns, Canada’s economy rebounded better than expected as restrictions were relaxed. Employment levels grew faster than anticipated, as did consumer spending. The housing market continued to perform well. Unlike many developed nations, Canada’s household incomes grew at a time when the economy contracted; savings rates also increased.* Many financial institutions that set aside significant amounts for loan loss provisions in anticipation of mortgage or credit defaults have recently seen reductions in those reserves.
These successes were, in part, due to significant stimulus measures. Canada has been more generous than most nations with its support and, as a result, will have the largest stimulus deficit globally in 2020(as a percentage of GDP).** While there are likely to be future consequences, the good news is that the current cost of carrying this debt remains low due to near-zero interest rates.
South of the border, the U.S. has chosen a new path forward after a highly contested presidential election. Given considerable and continuing unrest, there is hope that this change will temper tensions and newly passed stimulus efforts will help to support Americans throughout the winter.
Driving optimism for the end to the pandemic has been the remarkable progress made in the race to find a vaccine. This is an exceptional feat, given the typical vaccine time-to-market is 10 to 15 years. The fastest ever has been the mumps vaccine, which took four years.***
Progress in combatting a pandemic takes time. Progress in investing may involve greater endurance. During 2020, while the many ups and downs of equity markets captured attention, they aren’t the ones that matter for most longer-term investors. Assuming you can stay the course for long enough, the results can be significant. The Rule of 72**** provides a good reminder: at an annual rate of return of five percent, an investment will double in around 14 years. For those who may not think they have the benefit of time, consider that 90 percent of renowned investor Warren Buffett’s wealth was made after the age of 65.*****
Most notably, despite the many challenges we faced in 2020, we have seen that equity markets don’t wait on the sidelines for recovery to happen. They are, after all, forward looking in nature. Perhaps this is an admirable quality to uphold as we leave 2020 behind and bring in a new year. As we look forward, we would like to thank you for your trust and confidence in our services during what has been an unprecedented time.
****Rule of 72: It takes approx. 72÷(rate of return) years for investment to double
*****Based on shares ofBerkshire Hathaway (BRK-A). 8/30/95: $25,300; 10/30/20: $302,500
This article was originally published in the newsletter, "Challenging the Trend." Click here to view.
The views expressed are those of Wes Ashton, Director of Growth Strategy and Portfolio Manager, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund.