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The rebounds we’ve seen in stock markets may have renewed optimism for some, as they look beyond the pandemic. The economy, on the other hand, tells an entirely different story. Eric Lascelles, Chief Economist, RBC Global Asset Management, joins Dave to discuss his outlook, and what’s behind these diverging views. (Recorded July 16, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson, and I am joined by Eric Lascelles, Chief Economist at RBC Global Asset Management. Now, I know some of you became very happy that Eric was a regular guest on this program. We’ve since gone to some other guests because Eric is so prolific. If you follow him on Twitter, he has an amazing follow on Twitter - I highly encourage you to do that. Also, if you go to the RBC Global Asset Management web site, there are all kinds of written and video content featuring Eric, and I always encourage you to do that. It’s nice to see the person instead of just hearing their voice. But because we’ve talked so much on this podcast with different investment managers about the seeming disconnect between what we’re seeing in markets — which have recovered significantly from their lows in late March — and where we are today, I thought it would be a really good idea to bring Eric back to take a look at where we are with the resurgence of COVID-19 in some parts of the U.S., and really where the economy is relative to what markets are telling us economies are at. So, Eric, with that tee- up, what are you seeing?

Right. Well, you’re certainly right in saying that not all parts of the world are on a happy recovery trajectory, at least from a COVID-19 perspective. I do want to start by saying many countries — in fact, most of the developed world -- do still look fairly good, including Canada. In terms of declining intensity of transmission, declining death rates, and ultimately a rebounding economy as well. And so let’s not forget about that part, which is quite good. But it is fair to say when you look at the global numbers, we have more global cases per day now. It’s mostly an E.M. and a U.S. story. We all care quite a lot about the U.S. in particular, I suspect. And that’s been a frustrating experience. It seems like they reopened maybe too soon, but even more importantly, just too much in terms of what they allowed. And unfortunately, they’re now being forced to go a little bit into retreat right now. And when we look across the 50 U.S. states, the majority actually are now suffering a rising number of cases. But I will say this, there’s not a lot of clarity in terms of when the second wave peaks, but I personally think it could be over the span of the next month. I don’t think it has to be months and months and months from now. Initially, we were a bit skeptical. We weren’t sure, given the politicization and some of the ideologies at play that we could see. Some of these, particularly Southern states, reversed course. Texas and Florida are types of examples. And yet, to some extent, at least, they have. We are now seeing more mask orders in those states. We are seeing bars broadly closed and restaurant usage more limited. And I’ll be perfectly honest, it is an open question whether that’s enough. I’m reasonably confident that’s enough to stabilize the infection rate but I think when you’re clicking along at 10 or 15 000 infections a day in some of these states, you probably like to do more than just stabilize. We’d like to see it actually come down. And that might yet take another round of activity. But we’re looking very closely. Arizona, for instance, might be starting to peak already. I could yet be proven wrong, by the way, on that, but it sort of looks that way in the hospitalization and the infection data. And so I wouldn’t be surprised if we started to see things flatten out and maybe get a little bit better. But nevertheless, it’s left the U.S. economy behind. And so we had this happy recovery from mid-April through late June. That’s continuing in places like Canada, and it’s a wonderful thing. We think it’s basically going into reverse for a month or two in the U.S., and it just means the recovery gets pushed further out into the future. But I do still think it can be managed in the U.S. And let’s not forget, we’re still getting fairly exciting advances from a medical and scientific perspective as well. And actually, one of the great happy silver linings in a pretty grim affair is that both at the global level and the U.S. level, you’re seeing records set in terms of the daily infections, which isn’t good at all, but the fatality figures have not to the same extent been setting records. In fact, broadly, they’ve been lower than they were in April. And there are a few drugs that significantly reduce the risk. Simultaneously, you see better medical practices. Also, younger people are getting infected more. They’re the ones moving around with a little bit more freedom. So on all those counts I do think this can and will be controlled.

So, Eric, the market rebound, though, has been so strong. And is that just a case of so much monetary and fiscal stimulus out in the global economy and particularly in North America and Europe, or the markets just looking so far out and just bypassing all of this next wave or continuation of the first wave we’re seeing? Are they just too optimistic, in your view?

Yes I think all the reasons you’ve given are pretty valid explanations, at least whether they completely hold water or not. You’re certainly right. Markets are forward looking. 2020 is a disaster. 2021 won’t be normal. But, gee, if you want to stock your earnings also in 2022, and 2023, and the year 3000, if you care about that. When you tally all of that and do a present value calculation, you can argue stocks didn’t have to go down a ton in response to this. Similarly, it’s a case in a very low interest rate world, you could argue the bond market is almost hard to invest in to some extent. A lot of people may be feeling they have to be in those risk assets like equities or credit and this kind of thing. And so I think those are valid reasons. Nevertheless, I’d be lying if I said I thought the stock market would be where it is right now, given the enormity of the COVID-19 impact. So it has been a more enthusiastic rebound than I would have expected. And as you likely know, in terms of our own tactical asset allocation, we are now positioned a bit more cautiously, not with any kind of magical foresight that the market has to go down. We don’t know that. And markets usually go up, not down, but they do with less conviction that they’re going to go up enthusiastically in the next year, just given some of the challenges that are afoot right now. And so I guess that’s ultimately where we’re juggling things and leading things right now. If you are a medium or long-run investor, this is not a bad place to be invested, I suspect. And most of us hopefully are in that position. It’s hard to say with precision beyond that. The second wave, we think we know what’s going on, but there are no guarantees there. Similarly, we talk about second waves, there are also second-round effects here, right? And so we know the economy is a whole lot better than it was a few months ago. Maybe half of the decline has been recovered in Canada. Unfortunately a little bit less than that in the U.S., given recent developments. But the other relevant consideration is, there’s still another month in which restaurants are earning less money than normal, another month in which some workers are earning less. There are some accruing problems out there, and by no means does it assure disaster at all but we were a little more cautiously positioned, perhaps, than we were a few months ago.

Eric, as always, an excellent synopsis. And once again, for anyone who’s listening to this podcast regularly, I strongly encourage you, if you are on Twitter, to follow Eric and also to look up his longer form content. If you want more details, because it’s just fantastic work and it’s always available on the RBC Global Asset Management Web site. I don’t know if there’s a more prolific economist in Canada. There probably is somewhere, but not one that I’m aware of and I follow quite a few of them, but I never miss Eric’s stuff. Eric, thank you again for your time today.

My pleasure. Thank you all.


Recorded July 16, 2020

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