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On Monday, both the Dow and S&P 500 saw their strongest rebounds since early March, due in part to recent news of a prospective coronavirus vaccine. Stu Kedwell, Co-Head, North American Equities, RBC Global Asset Management, breaks down the role of key players like Amazon, Microsoft, and Facebook in the rally. He also looks at how these positive developments in medicine and economic reemergence can potentially lead to opportunities in broader markets.


Hello and welcome to the Download. I’m your host

, and I’m joined for Stu’s days with

, the co head of North American Equities at RBC Global Asset Management. Stu, welcome back.

Hi, Dave. Thanks for having me.

We’ve been watching the markets and we’re back in Canada from the Victoria day long weekend. Markets were open in the U.S. on Monday and we saw a powerful rally. As we’ve talked off line over the last few weeks, if we go back to the lows in late March, and we’ve seen the market come back a significant amount since then, you mentioned that the breadth of that rally back has been fairly limited. Could you talk about that a little bit?

Sure. It’s an interesting phenomenon, as we’ve seen since the middle of March, where the headline S&P 500 has rebounded quite significantly. But if we made an index and we equal weighted it — which means that every stock has the same weighting —, while it’s rebounded, it hasn’t been nearly as robust as the broader market. And that’s been due to the very strong performance of Amazon, Microsoft, Apple, Google, Facebook and others, where those stocks are very large weightings of the index and they’ve been very strong performers. And that’s been due to a couple of things. First, their businesses have generally been intact and their financial position is very strong. The second thing is the way that financial math works. When interest rates go down, we talk about discounting future cash flows. So if you have very visible cash flows, — those five have perhaps more visible cash flow than the entire market — and the discount rate goes down or the interest rate goes down, then the valuation of those cash flows can expand quite meaningfully. So you look at those businesses and you see them back at new highs. In some cases, business momentum is strong. In other cases, you look and say, well, that can’t quite make sense because it’s not quite as rosy an outlook as it would have been the last time they were here. They’re heavily influenced by that discount rate. The broader market really needs the economy to do better. Where the focus has been in the last two or three days for the marketplace, we have all these re-opening signs and it’s very difficult to know how reopening will go. What will people’s reaction be? Will there be a reoccurrence of Covid down the road? But in the early days, the market is taking a bit of an optimistic tone. And then the second thing is: there was some news yesterday about a vaccine and that, while it’s still a long way from being in place, was somewhat encouraging news. And if the economy can reopen and do reasonably well, then it can help a lot more stocks within the market. So that’s one of the driving factors that we’ve seen in the last three or four days.

And so the prospects for a vaccine and the prospects for the economy reopening and starting to re-emerge and come back towards where it was before allows for the market to broaden. Let me ask a question that perhaps an investor would have from that point of view: as an investment manager and as a professional investment manager, what market do you prefer operating in? You’re comfortable in both, but is there one where your skills are put more to use than another?

Well, to your point, we are comfortable in both. But when the market broadens, there are more stocks that can participate, which most active managers tend to like more. So it’s one thing to be respective of trends that are in place — and those top five are very powerful businesses —, but there are a lot of other good businesses out there that will have very interesting recovery potential once the economy reopens, and that gives us an opportunity to go and study them in a manner that suits our skill set a little bit as well.

And so you’re still trying to find the better of that broader group. But it’s a better environment to operate in because there’s just more to choose from and more opportunities to find.

That’s exactly right.

Perfect. Well, Stu, thank you. Thanks for that update. And we’ll look forward to checking in with you next week. Thanks as always.

Great. Thanks very much. Thanks for everyone’s time.


Recorded May 19, 2020

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