SUMMARY...Economic Outlook | 1 The COVID-19 pandemic has dealt a historic shock to the world...

Economic Outlook | 1

The COVID-19 pandemic has dealt a historic shock to the world economy, with Q1’s decline alonecomparable to the peak-to-trough decline in the worst recession before the 2008/09 financial crisis.At the same time, the anticipated cumulative 12% drop for the G7 in the first half of this year morethan doubles the hit from that historic downturn a little more than a decade ago.

The heightened concern and pessimism over the current situation permeated into expectations forgrowth; however, these downbeat views largely neglected to take into account what actuallyhappened to the global economy.

The fact that the downturn, sharp as it is, is the result of an exogenous shock to the supply-side ofthe economy rather than structural issues impacting demand, making it very different from previousexperiences. Typically, in scenarios of this kind, activity can normalize fairly quickly once thoseexternal forces subside, resulting in a rapid ‘V’-shaped rebound in momentum.

Indeed, data covering everything from housing to consumer spending to construction to industrialproduction across the globe are exhibiting a conspicuously sharp inflection from the lows registeredamid widespread shutdowns in April.

There is still plenty of ground to make up before we can consider things are ‘good’ in an absolutesense. How the recovery progresses from here depends on whether or not the rolling back ofemergency measures to stem to the spread of infection can continue unabated — a process that isbeing complicated by the accelerating spread of infection in the US and major EM economies.

To the extent that the non-zero odds of a renewed large-scale lockdown can be diminished — forexample, by indications that the contagion is coming under control, or there is progress on thedevelopment of therapeutics — that would present upside risks to the outlook. It still appears thatthe balance of risks is tilted in this direction.

As such, risk assets appear primed to continue on their road to recovery from their crisis lows, asinvestors continue to pare the undue weight assigned to the worst-case scenario outcomes.

SUMMARY


To ‘V’ or not to ‘V’, that is the question

While it was broadly assumed to be the case when

the global economy went into lockdown on June 8,

the National Bureau for Economic Research’s

Business Cycle Dating Committee (the arbiters of

the economic cycle) officially declared that the

economy entered recession in March.

That declaration formally ended the expansion that

began in July 2009 and closed the books on the

longest stretch of continuous growth on record.

CHART 1: IT WAS GOOD WHILE IT LASTED

Duration of US Economic Expansions (months)

Source: National Bureau of Economic Research, Guardian Capital

One record clearly deserves another. All indications

suggest that the decline in activity that resulted from

the shuttering of large swaths of the global economy

(in an effort to mitigate the spread of COVID-19 and

reduce its human cost) is of a magnitude never

before seen.

The aggregate real output from the G7 economies

(Canada, France, Germany, Italy, Japan, the UK

and US) is estimated to have contracted 2% over

the first three months of 2020; and is forecast to

have plunged by a record 10% in Q2 (which will

make headlines as a nearly 40% annualized

quarterly decline).

For some context, Q1’s decline alone is comparable

to the peak-to-trough decline in the worst recession

for the group before the 2008/09 financial crisis. At

the same time, the anticipated cumulative 12% drop

in the first half of this year more than doubles the

impact from that historic downturn just over a

decade ago.

CHART 2: A RECORD-BREAKING DIVE

G7 Real GDP Drawdown from Peak (percent)

Shaded regions represent periods of US recession Source: OECD, IMF, Bloomberg, Guardian Capital Bloomberg consensus forecasts for Q2 2020 as at July 17, 2020

The unprecedented hit to the global economy,

and the associated historically elevated levels of

uncertainty, led fear to become the dominant

emotion. This fear triggered a spike in financial

market volatility that coincided with the quick and

sharp sell-off in risk assets stopping the 11-year

equity bull market, dead in its tracks.

CHART 3: WE LIVE IN UNCERTAIN TIMES Global Economic Policy Uncertainty Index (index)

Shaded regions represent periods of US recession Source: PolicyUncertainty.com, Bloomberg, Guardian Capital

The heightened concern and pessimism permeated

into expectations for growth: would the future

trajectory be “\”-shaped, where activity continues to

plunge toward zero; ‘L’-shaped with the recession

morphing into a long period of stagnation; or ‘U’-

shaped, where that stagnation eventually gives way

to a rebound once a cure for the coronavirus was

developed down the road?

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These downbeat views, however, largely neglected

to take into account what actually happened to the

global economy.

First of all, not all economic contractions are cut

from the same cloth. The duration of a recession

and how long it takes for a recovery to take hold are

entirely dependent on what caused the downturn.

Driving the last two global recessions were

significant imbalances in the marketplace: the tech

bubble around the turn of the millennium and the

housing and credit bubble in 2007/08, both of which

were popped by the tightening of monetary policy.

The speed of the rebound from these types of

slumps depends on how long it takes imbalances to

get back into balance — and that can mean a long

and drawn out period for demand to recover. Such

was the case in the aftermath of the housing market

crash that left most banks (the grease in the

economic cogs) in need of serious healing, and

many households in rough financial shape.

In contrast, a downturn that results from an

unforeseen event like a natural disaster or public

health crisis results in a supply-side shock. In these

circumstances, demand has not necessarily been

eroded but there are sudden outside factors

inhibiting the ability of business to return to normal.

As such, activity is able to normalize fairly quickly

once those external forces subside, resulting in a

rapid ‘V’-shaped rebound in momentum. The bulk of

displaced labour has been effectively furloughed

instead of fired and is able to step back into their old

jobs as soon as the “all clear” has been signaled.

This is the typical experience for economies hit by

hurricanes, tornados and earthquakes. It also

echoes what played out in perhaps the most

comparable situation to the current: the Spanish flu

pandemic that infected nearly a third of the world’s

population, killing 40 million people globally, and

inducing a downturn in 1918/19, which stands

among the shortest recessions on record.

CHART 4: DOWN BUT NOT FOR LONG

Duration of US Recessions (months)

Source: National Bureau of Economic Research, Guardian Capital

Secondly, the expectation that conditions would only

continuously deteriorate ignored the role of policy.

In times of economic crisis, policymakers on both

the fiscal and monetary side typically step in to try to

blunt the impact of the collapse of private demand

and provide a general backstop for the economy.

This time was no different — though it was quite

different in terms of the speed and magnitude with

which these official bodies acted.

Since March, governments across the G20

economies have pledged nearly $8 trillion (11% of

G20 GDP) in fiscal support from programs, including

direct payments for individuals, to loans for

businesses and infrastructure investments. There is

considerable variation across countries though, with

the major Developed Market (DM) committing nearly

10 percentage points more of their GDP in support

than their EM counterparts.

CHART 5: LET’S GET FISCAL

Announced COVID-19 Fiscal Response, G20 (percent of gross domestic product)

Source: Center for Strategic & International Studies, IMF, Guardian Capital

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While emergency measures are warranted to help

keep economies afloat through the forced sidelining

of activity, the associated substantial deterioration of

fiscal balances, and resultant surge in public debt,

will undoubtedly prove to be a burden that will need

to be addressed down the road. That means either

reduced public spending, increased taxes or both —

policies that will provide an unambiguous drag on

future overall economic growth.

CHART 6: IMBALANCED BUDGETS

Gross General Government Fiscal Balance (percent of gross domestic product)

* 2020 forecasts from IMF’s June 2020 World Economic OutlookSource: Bloomberg, International Monetary Fund, Guardian Capital

For now (and the foreseeable future), however, the

cost of carrying that growing debt burden is far from

onerous thanks to central banks worldwide slashing

interest rates to never-before-seen levels.

The US Federal Reserve (the Fed), Bank of England

(BOE), Bank of Canada (BOC), Reserve Banks of

Australia (RBA) and New Zealand (RBNZ), and

Norway’s Norges Bank have all cut their policy rates

to their effective lower bounds. The net result has

been that the weighted-average short-term interest

rate for the group has fallen by nearly 100 basis

points from February’s levels and into previously

uncharted negative territory.

CHART 7: LESS THAN ZERO

Aggregate Central Bank Short-Term Policy Rate* (percent)

*GDP-weighted average policy rate of 11 Developed Market central banks Shaded regions represent periods of US recession Source: Bloomberg, International Monetary Fund, Guardian Capital. Weekly data to July 17, 2020

Monetary authorities have also re-opened their

unconventional policy toolkits, implementing

numerous lending facilities and restarting (or

introducing for the first time) asset purchase

programs (they also broadened the scope of those

programs). These programs pumped liquidity into the

financial system, and eased dislocations in funding

and credit markets; helping prevent the public health

crisis from turning into a financial crisis.

As a result, central bank balance sheets have

expanded by nearly $6 trillion since February — for

some context, it took more than five years for

balance sheets to expand by this magnitude during

the financial crisis.

CHART 8: HERE WE GROW AGAIN Central Bank Balance Sheets (trillions of US dollars)

Source: Bloomberg, Guardian Capital

Taken together, this represents an unprecedented

degree of policy stimulus that has so far created an

unambiguously positive effect on economic activity.

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A funny thing happened on the

way to the economic apocalypse

While the pandemic is still far from over, many

countries’ success in slowing the spread of infection

and mitigating the strain on their healthcare systems

has permitted policymakers to scale back the

stringent measures put in place and start to reopen

their economies. Though the bulk of social

distancing initiatives remain in place, broad

reductions have occurred from their peak levels.

CHART 9: EXTREME MEASURES

Government Response Stringency Index* (index)

*The Stringency Index is a composite measure calculated as the simple additive score of seven indicators measured on an ordinal scale, rescaled to vary from 0 to 100; the indicators are school closings, workplace closings, public event cancellations, public transport closures, public info campaigns, restrictions on internal movement, and international travel controls Source: Oxford COVID-19 Government Response Tracker; Guardian Capital

As restrictions on activity have eased, many

businesses have been able to re-open over the last

two months. For example, it is estimated about 60%

of shuttered small businesses in the US have

reopened by the end of June.

CHART 10: BACK IN BUSINESS

US Local Businesses Open (percent change from median weekday from January 4 to 31)

Source: Homebase, Bloomberg, Guardian Capital

With this, workers have been able to return to their

places of employment. The official job market data

available through June indicate that the G7

economies have already recovered one-third of the

jobs lost in March and April.

CHART 11: BACK TO WORK

G7 Total Employment (millions)


Of course, the ebbing of supply-side constraints

does not matter all that much if customers are either

unable or hesitant to return. On that score, however,

the high frequency data have been almost uniformly

encouraging.

At the end of June, consumer spending in the US

was just 9% below its pre-crisis levels. However,

there is understandably, considerable variation

across categories, with those areas still under tight

restrictions (arts & entertainment and food services

& accommodation) lagging while other segments

(namely grocers and general merchandisers) are

effectively already back to normal.

CHART 12: CONSUMERS CONSUMING

US Consumer Spending (percent change from median weekday from January 4 to 31)

Source: Affinity Solutions, TrackTheRecovery.org, Guardian Capital

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More broadly, activity in both the goods-producing

and service-providing sectors of the world economy

has perked up sharply over the last two months as

evidenced by the rebound in the bellwether global

purchasing managers’ indexes. Every component

country that makes up the aggregate gauge of

economic momentum has registered an

improvement in the last few months, so this is a

story of synchronous improvement rather than a few

countries skewing the measures.

CHART 13: ‘V’ERY QUICK TURNAROUND

Global Purchasing Managers’ Indexes (index; >50 denotes expansion)


Note the distinctive ‘V’-shape evident in the line

chart of these indicators.

In fact, data covering everything from housing to

consumer spending to construction to industrial

production across the globe are exhibiting a

conspicuously sharp inflection from the lows

registered amid widespread shutdowns in April.

The aggregated, composite leading economic

indicator for the 36 industrialized economies of the

Organisation for Economic Cooperation and

Development (OECD) and six other major emerging

economies, has posted its biggest jump on record in

the two-months to June.

CHART 14: LEADING THE WAY FORWARD

OECD+ Composite Leading Economic Indicator (index; >100 denotes above trend growth)

Shaded regions represent periods of US recession Source: OECD, Guardian Capital

How is the outlook looking?

The gap between economic output and its previous

peaks has narrowed; however, there is still plenty of

lost ground to make up. Things are getting better for

sure, but still not in a place, we can consider ‘good’

in an absolute sense.

Should the resumption of activity continue on its

current trajectory, there is upside risk to growth as

hopes of a ‘V’-shaped recovery are realized.

For such a scenario to play out, however, the

stringent measures put in place by governments

around the world need to continue to be rolled back

and permit consumers and businesses to return to

something akin to ‘business as usual’.

That is becoming increasingly difficult amid signs

that the spread of COVID-19 is escalating

aggressively in not only several major EM

economies (most notably Brazil), but also the more

economically important US.

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CHART 15: TWO ROADS DIVERGED…

New Confirmed Cases of COVID-19

(case per million people, seven-day moving average)

Data to July 11, 2020 Source: Bloomberg, Johns Hopkins University, Guardian Capital

There is limited, if any, appetite for renewed

lockdowns, should such measures be necessary to

once again arrest the contagion in the absence of

vaccines or therapeutics (which are on the horizon,

but not ready yet). A renewed lockdown could stop

the recovery in its tracks and increase the likelihood

that the growth outlook is more ‘W’-shaped.

There are already signs of economic momentum

rolling over in those regions of the US that are

experiencing the most severe outbreaks, such as

the recent slump in restaurant reservations — no

doubt in part a reflection of some areas again

tightening restrictions on public gatherings.

CHART 16: HAVING SOME RESERVATIONS

Seated Diners at Restaurants on the OpenTable Network (year-over-year percent change, seven-day moving average)

Source: OpenTable Data Centre, Guardian Capital

Such a path is not the base-case, but it is also a

non-zero probability given the deterioration in

conditions stateside. The potential for a repeat of

what played out through March is dampening

expectations and tempering enthusiasm over the

growing signs that the global economy is amid a ‘V’-

shaped rebound.

With that said, should indications emerge that the

contagion is coming under control (and there are

some nascent signs of a slowing in new cases

stateside), that would diminish the odds of this

worst-case scenario materializing and present

upside risks to the global outlook.

Managing expectations

The underlying balance of risks to the outlook clearly

carries substantial importance to financial markets.

Indeed, the simplest explanation for the rapid

rebound in financial markets since the end of March

is that things have been playing out much better

than expected. This unexpected improvement is, in

part, a function of the extremely pessimistic

expectations priced into the marketplace during the

early and highly uncertain days of this public health

crisis.

Asset valuations in financial markets (in theory)

reflect consensus expectations. If everything turns

out as expected, there should be no reason for a

revaluation — any price changes therefore should

be the result of new and unexpected information.

The onset of the pandemic was clearly an

unexpected event that carried wide-ranging

implications. The initial shock and uncertainty

caused many investors to reprice their expectations,

but entirely too much weight was put on the worst-

case scenario and markets cratered accordingly.

As policymakers introduced the massive slate of

stimulus measures and provided a backstop to key

structural elements of the economy (namely, funding

and credit markets), the anticipation of the most

negative potential outcomes diminished materially.

The distribution of potential outcomes shifted to the

positive side as investors realized the first sharp leg

lower represented an overshoot to the downside.

Even still, market sentiment remained

overwhelmingly pessimistic. While the absolute

worst was viewed as less likely, there was a

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complete lack of optimism over the outlook as

uncertainty about both the current situation and the

near future remained shrouded in fog.

These low expectations left the balance of risk still

tilted to the upside and provided the scope for a

bounce if developments provided a positive surprise.

Positive data surprises have become plentiful. The

dataflow has so far shown that activity was actually

snapping back much faster than anticipated and

suggested that the worst may well be in the rearview

mirror. For example, the Citi Economic Surprise

Index for the G10 swung sharply and touched a

record high, in a sign that economic data beat

expectations by a previously unheard of degree.

CHART 17: I’VE NEVER BEEN MORE SURPRISED!

Citi Economic Surprise Index, G10 (diffusion index; >0 denotes reports exceeding expectations)

Shaded regions represent periods of US recession Source: Bloomberg, Guardian Capital. Weekly data to July 17, 2020

Accordingly, equity analysts, who initially rushed to

slash their earnings forecasts, have started to

backtrack and revise expectations higher.

Consensus earnings per share (EPS) projections

have moved off their lows, and earnings revision

ratios (a measure of EPS upgrades-to-downgrades)

actually improved across geographic regions and

industry sectors at the closing of the first half.

CHART 18: RATIOS REVISED

One-Month Earnings Per Share Revision Ratio

(ratio of upgrades-to-downgrades)

Source: Bank of America Merrill Lynch, Guardian Capital

Against this backdrop of shifting expectations, risk

assets rallied off their lows and seemingly have

positive momentum entering the second half.

Born to run

The MSCI World Index finished Q2 down just 6% on

the year and 10% from its all-time high, despite the

broad global equity benchmark plunging 34% from

its peak on February 12 — the market is up nearly

40% from its March 23 low.

CHART 19: A WILD RIDE

MSCI World Index (index)


On the surface, this magnitude of rebound coming in

the midst of a historic economic crisis could

reasonably raise concern that the market has gotten

ahead of itself with respect to the outlook. That

would suggest there might not be much room left to

run over the coming months — even if there is still

10% to go before retaking the previous peak.

Further to this, many ‘traditional’ valuation metrics

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are looking historically stretched currently. For

example, the forward price-to-earnings ratio for the

MSCI World Index is 23x, which is nearly four

standard deviations above the 15-year average.

CHART 20: A LITTLE RICH FOR MY TASTE

MSCI Country Index Forward Price-to-Earnings Ratio (standard deviations from 15-year average)

As at June 30, 2020 Source: Bloomberg, Guardian Capital

Still, that said, given the heightened uncertainty over

the near-term and significantly, wider than typical

confidence intervals of forecasts, these are not

necessarily the useful gauges of fundamental value,

as they are in ‘normal’ times.

Moreover, it is important to recognize that while

broad market benchmarks serves as a good enough

representation of how the market is performing on

average, they definitely do not tell the entire story of

what is going on under the hood. The strong overall

rebound has not been felt in all areas of the market.

The MSCI World Index is a market capitalization

weighted average composite of the more than 1,600

stocks from 23 DM economies. It may be down just

6% for the year, but the average (and median) stock

in the index is still down nearly 10% — and as of the

end of Q2, one-third of the component stocks in the

index are still down 20% or more year-to-date.

In other words, there has been substantial

performance dispersion within the marketplace, as

evidenced by the spread of year-to-date

performance of the index’s 11 industry sectors (and

just 4 have outperformed the overall benchmark).

CHART 21: NOT EXACTLY SHARING THE WEALTH

MSCI World Sector Performance, Year-to-Date* (percent)

*To June 30, 2020 Source: Bloomberg, Guardian Capital

What that narrow leadership would suggest is that

the market is not exactly pricing in the type of growth

that will cause all segments of the economy to come

roaring back. Instead, the perception is more of a

mixed outlook that will result in winners and losers

across sectors.

Against this backdrop, any positive developments

that accelerate the return to normal for the broader

global economy (such as rapid progress on

developing a vaccine and therapeutics for COVID-

19) could result in consensus expectations for

economic growth (and earnings) finding that higher

is the path of least resistance. Shifting expectations

higher, in turn, would provide a fundamental basis

for stocks having plenty of room still left to run.

The going rate

Even if growth does not offer an upside surprise

(and absent a new shock to the system), there is a

significant support for risk assets that is going to

remain for the foreseeable future.

At their most basic level, asset prices equal the

present values of their future cash flows. These

future payments to investors (such as dividends,

coupon payments and buybacks) are discounted

into a present value using their expected rate of

return, which is the market’s risk-free rate and a

premium to compensate investors for taking on

some risk by holding that asset.

All else the same, a lower interest rate raises that

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calculated present value and therefore means

higher asset prices and higher valuations.

So, while equity prices may look expensive in the

context of the deterioration in expected earnings and

continued uncertainty over the outlook, relative to

where yields on government bonds (traditionally

viewed as risk-free assets) currently sit, equities

actually look quite inexpensive.

CHART 22: IT’S ALL RELATIVE

MSCI World Earnings Yield-to-Global Government Bond Yield (ratio)

Dashed line is pre-financial crisis average; bars +/-1 standard deviation Shaded regions represent periods of US recession Source: Bloomberg, Guardian Capital Monthly data to June 30, 2020

Accordingly, from the perspective of a balanced

portfolio and with a cautious optimism over the near-

term outlook, a continued tilt in allocations toward

equity over bonds appears to be supported.

With that said, however, the uncertainty over the

outlook suggests that it remains prudent to try to

manage risk exposures. For example, while the

balance of macroeconomic risks arguably is tilted to

the upside and therefore could clearly benefit assets

and sectors that are most levered to the economic

cycle, those segments would also be more

vulnerable should a renewed downturn materialize.

As such, the limited visibility is not necessarily

supportive of chasing growth for the sake of growth

as much as it is about putting an emphasis on

‘quality’ growth. That is, looking at those companies

that are able to consistently generate solid earnings

growth with low leverage thanks to sustained

advantages over competitors, and focus on secular

trends rather than cyclical ones.

Historically, companies that score highly in terms of

profitability, earnings growth stability and leverage

tend to keep pace with the overall benchmark in up-

markets, but more importantly, are better suited to

weather market turbulence and thus outperform

when markets decline.

CHART 23: RIDE THE WAVE AND DON’T SINK

MSCI World Style Index Up- and Down-Market Capture* (percent)

*Based on monthly data for the 30-year period ended June 30, 2020 versus the MSCI World Index Source: Bloomberg, Guardian Capital

These characteristics, as well as the premium

placed on stable fundamental growth in an

environment of limited opportunities and heightened

uncertainty about growth, suggest that equities that

meet these criteria could continue to warrant

relatively high valuations no matter the

developments.

Similarly, the US would appear to be the best region

in terms of the trade-off between risks and rewards

given the current uncertain market backdrop.

CHART 24: REGIONAL RISKS & REWARDS

MSCI World Country Index Up- and Down-Market Capture* (percent)

*Based on monthly data for the 30-year period ended June 30, 2020 versus the MSCI World Index; US dollar basis Source: Bloomberg, Guardian Capital

0

2

4

6

8

10

12

14

16

18

20

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Stocks relatively expensive

Bonds relatively expensive

75

80

85

90

95

100

105

Growth Quality Value HighDividend

Up-Market Capture Ratio

75

80

85

90

95

100

105

Quality HighDividend

Value Growth

Down-Market Capture Ratio

80

85

90

95

100

105

110

EM Canada US EAFE

Up-Market Capture Ratio

85

95

105

115

125

US EAFE Canada EM

Down-Market Capture Ratio


On a fixed income

Central bank intervention in bond markets has had

an unambiguously positive impact on the

performance of fixed income securities in the first

half of 2020. The combination of aggressive rate

cuts and large-scale asset purchase programs have

pushed government bond yields across the curve to

historically low levels.

CHART 25: LOWERING THE BAR

ICE Bank of America Global Bond Yield Curves (percent)


Clearly, the lower rate environment is beneficial to

borrowers like governments and businesses as it not

only has lowered their cost of capital but also

allowed them to lock in low rates for extended terms.

This resulted in the average duration of debt in the

bond market hitting all-time highs.

CHART 26: GETTING LONGER

ICE Bank of America Global Bond Index Duration (years)

Shaded regions represent periods of US recession Source: Bloomberg, Guardian Capital

The situation, however, is less appealing for the

investors given they are the ones doing the lending.

The increase in duration, by definition, means that

fixed income securities are more sensitive to

movements in market interest rates. As yields have

declined, that has meant that bond investors have

been able to receive strong returns over the last six

months. Going forward, however, there is little

expectation that those gains will be sustained.

Central banks globally are now at their effective

lower bounds for policy rates and have expressed

limited appetite for any further cuts. Consequently,

markets are effectively pricing in no further actions

for the next year.

CHART 27: STEADY AS SHE GOES

OIS-Implied* Change in Policy Rates Over Next 12 Months

(basis points)

*Difference between 12-month overnight index swap rate and policy rate Source: Bloomberg, Guardian Capital

Of course, there is little expectation for policy rates

to rise any time soon as inflationary pressures

remain nowhere to be seen. Forward guidance from

the Fed and BOC, for instance, indicates that the

current low level of short-term interest rates will

remain through at least 2022.

CHART 28: HERE FOR A LONG TIME, NOT A GOOD TIME

Source: Federal Reserve Board, Guardian Capital

30-Jun-20

31-Mar-20

31-Dec-19

31-Dec-18

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1-3 Years 3-5 Years 5-7 Years 7-10 Years 10+ Years

Term to Maturity

3

4

5

6

7

8

9

10

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Government

Investment Grade

High Yield

-100

-80

-60

-40

-20

0

20

31-Dec-19 31-Jan-20 28-Feb-20 31-Mar-20 30-Jun-20

US Federal Reserve

Bank of Canada

Bank of England

European Central Bank

2.125

2.375

2.500

1.875

2.125

2.375

2.500

1.625

1.875

2.125

2.500

0.125 0.125 0.125

2.500

0.0

0.5

1.0

1.5

2.0

2.5

2020 2021 2022 Longer run

19-Jun-19 18-Sep-19 11-Dec-19 10-Jun-20

Federal Open Market Committee Median Projected Year-

End Fed Funds Rate Target

(percent)

3.0


With that said, the need for governments to tap

credit markets to finance their gaping deficits means

that a substantial supply of government bonds is

destined to be issued, which could put some upward

pressure on yields and negatively impact investors’

performance.

Any upside, though, is likely to be somewhat

contained, thanks to the ongoing presence of the

large, price-indiscriminate buyers that are global

central banks. Major DM monetary authorities now

hold the equivalent of more than one-third of the

market value of the global bond market on their

balance sheets and, with asset purchase programs

continuing for the foreseeable future, that share is

likely to continue to get larger.

CHART 29: BIG FISH IN THE POND

Central Bank* Assets as Share of Global Bond Market

(percent)

*Fed, ECB, BOJ, BOE and BOC Source: Bloomberg, Guardian Capital Weekly data to July 17, 2020

Given the magnitude of their role and the market’s

seeming dependence on central bank liquidity,

central bankers are going to face significant hurdles

should they ever want to extricate themselves from

public markets. However, much like how

governments will be forced to deal with the

ramifications of their fiscal policy decisions, that is a

bridge to be crossed later.

For the here and now, it means that government

bonds will likely be stuck in a range with limited

upside in the coming months — performance is

likely to be in line with the coupon on offer, which is

paltry at best and provides negligible cushion for

even modest rate increases.

Credit where credit is due

Higher yields are available on debt with either a

longer maturity or lower credit quality — but that

added carry comes with a commensurate increase

in risk, either from rising interest rates or default,

respectively.

Yield curves have steepened in recent months, but

that spread is still on the narrow side of history.

Further, the absolute yield provides no protection to

rising rates — a 10-Year US Treasury note yield of

0.65% means that a 6½ basis point rise would be

sufficient to wipe out the 12-month carry.

CHART 30: YIELDING TO THE CURVE

Spread Between 10-Year and 2-Year US Treasury Note Yields

(basis points)

Shaded regions represent periods of US recession Source: Bloomberg, Guardian Capital Monthly data to June 30, 2020

Corporate credit, however, looks more appealing.

Yields on both Investment Grade and High Yield

corporate debt (which have comparably lower

durations on average than government bonds) have

fallen sharply from the crisis highs thanks to the rally

in risk assets, and more notably, the fact that

several central banks expanded the scope of their

bond buying programs to include these issues

(including some speculative grade bonds).

Still, even with the declines and resultant narrowing

of credit spreads, the yield premia over government

debt still remain above their historical averages, in a

sign that corporate credit is an asset class that

appears to be relatively inexpensive.

14

18

22

26

30

34

38

2008 2010 2012 2014 2016 2018 2020

-50

0

50

100

150

200

250

300

1982 1986 1990 1994 1998 2002 2006 2010 2014 2018


CHART 31: SPREAD ‘EM

ICE Bank of America Global Option-Adjusted Yield Spreads

(basis points)

Dashed line represents series average; solid bars +/-1 standard deviation Shaded regions represent periods of US recession Source: Bloomberg, Guardian Capital Monthly data to June 30, 2020

However, issuers across the globe have been on the

receiving end of significantly more downgrades than

upgrades by rating agencies as the sharp economic

downturn weighs on credit quality.

CHART 32: GETTING NO CREDIT FOR THE OUTLOOK

Ratio of S&P Credit Ratings Upgrade-to-Downgrades

(ratio)

Source: Bloomberg, Guardian Capital Quarterly data to June 30, 2020

Defaults have already started to drift higher, and

troughs in the credit cycle typically come 6-to-12

months after credit spreads have peaked,

suggesting that the full fallout from the recession in

terms of business failures is still yet to come.

Notably, though, more than half of the issuers that

have defaulted are in the Energy sector (which

accounts for 14% of the ICE Bank of America Global

High Yield index, the index’s highest weight; for

comparison, Energy accounts for 3% of the MSCI

World Index, and oil and gas make up approximately

that amount of global output).

CHART 33: DEFAULT SETTING

High Yield Bond Par-Weighted Default Rate

(percent)

Shaded region represents period of US recession Source: Bank of America Merrill Lynch, Guardian Capital Monthly data to June 30, 2020

While the sharp economic downturn did the sector

no favours, idiosyncratic supply-side issues also

sideswiped Energy. That could suggest that the

overall trend in defaults is more reflective of the

sector-specific hit of 2015 than the broad-based

wave of defaults globally recorded in 2009.

Furthermore, the plethora of low-cost lending

facilities and credit enhancement programs

established by policymakers worldwide to help

businesses stay afloat through this crisis — in

addition to the central bank bond buying — could

mitigate pressures by reducing the likelihood of

firms running short of cash, and limit a sustained

broad upswing in corporate defaults.

Finally, as with equities, the view that the balance of

risks to the outlook is tilted to the upside, is positive

for corporate credit fundamentals. That would drive

a further narrowing in spreads, which could

supplement the returns recorded from the relatively

higher absolute yield on the securities.

Also echoing the view on equities, the persistent

uncertainty over the economic outlook would

suggest a continued preference toward quality in

credit remains prudent with a bias in allocations

toward higher credit quality issues.

Complex commodities

As if the collapse of economic activity on its own

was not enough, the Energy sector has also had to

0

50

100

150

200

250

300

350

400

450

500

1998 2001 2004 2007 2010 2013 2016 2019

Investment Grade

0

300

600

900

1200

1500

1800

2100

1998 2001 2004 2007 2010 2013 2016 2019

High Yield

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

US

Canada

South America

Europe

Asia-Pacific

0

5

10

15

20

25

2006 2008 2010 2012 2014 2016 2018 2020

US

US ex. Energy

Europe


endure a crisis of its own making.

The (brief) dispute between the Organization of

Petroleum Exporting Countries (OPEC), led by

Saudi Arabia, and non-member Russia roiled

markets. The rise in crude oil output, at a time when

demand was slumping thanks to the stay-at-home

orders and forced shutdowns of industrial activity,

sent inventories skyward.

CHART 34: PIPELINE PRESSURES

World Stockpiles of Crude Oil & Other Liquid Fuels

(billions of barrels)

Shaded region represents period of US recession Source: Energy Information Administration, Bloomberg, Guardian Capital Monthly data to June 30, 2020

The sizable supply and demand imbalance put a

strain on pipeline capacity and resulted in elevated

storage costs. These combined with some of the

crude futures market operational quirks to send

front-month West Texas Intermediate (WTI) oil

prices diving deeply in negative territory in late April.

CHART 35: BELOW ZERO

Shaded region represents period of US recession Source: Bloomberg, Guardian Capital Daily data to July 17, 2020

The market has generally stabilized since. The

stronger-than-anticipated recovery of economic

activity so far has provided support via improved

demand. As well, an agreed upon record large

production cut by OPEC and Russia, and sharp

reductions in output by US producers, has helped

ease supply-side strains.

CHART 36: THIS IS NOT A DRILL

Crude Oil Production

(millions of barrels per day)

Shaded region represents period of US recession Source: Bloomberg, Guardian Capital Monthly data to June 30, 2020

The world remains awash with oil, however, and

plans for OPEC and Russia to scale back their

curtailments starting in August will slow the speed of

the needed rebalancing. This provides little reason

to anticipate that oil prices will break out of their

new, lower trading ranges in the foreseeable future.

Base metals, in contrast, already underwent the

protracted market rebalancing that left stockpiles at

more than decade lows. The commodities are now

in a much better position to weather the unexpected

drop in industrial demand — as well as ride the

subsequent rebound that has left the Bloomberg

Base Metals Index retesting the highs of the year.

CHART 37: METALS FIND THEIR BASE

London Metal Exchange Warehouse Stocks (millions of metric tonnes)


2.3

2.5

2.7

2.9

3.1

3.3

3.5

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

-40

-20

0

20

40

60

80

100

120

140

2008 2010 2012 2014 2016 2018 2020

0

2

4

6

8

10

12

14

2008 2010 2012 2014 2016 2018 2020

US Russia Saudi Arabia

Canada Iran Venezuela

0

1

2

3

4

5

6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Copper

Nickel

Zinc

Aluminum (RHS)

West Texas Intermediate Crude Oil Price

(US dollars per barrel)


Gold has fared even better, as the backdrop of

elevated volatility, low interest rates, central bank

balance sheet expansion and deteriorating fiscal

positions plays right into the traditional safe haven

asset’s wheelhouse.

Prices for the yellow precious metal have been bid

up to their highest levels since the 2013 sovereign

debt crisis — and all-time highs will likely get

consideration as the confluence of constructive

market forces for gold remain in place for the

foreseeable future.

CHART 38: GOLD MEDAL PERFORMANCE

Spot Gold Price

(US dollars per troy ounce)

Shaded region represents period of US recession Source: Bloomberg, Guardian Capital Daily data to July 17, 2020

The road to recovery

The world has been dealt a historic shock from the

COVID-19 pandemic, and while the crisis remains

ongoing, there is reason to think that the worst is

now in the rearview mirror.

To date, growth momentum has recovered much

faster than anticipated, and the economy is in a

much better place than it was three months ago.

Still, there is plenty of ground to make up before we

can consider things as ‘good’ in an absolute sense.

How the recovery progresses from here depends on

whether or not the rolling back of emergency

measures to stem to the spread of infection can

continue unabated — a process that is being

complicated by the accelerating spread of infection

in the US and major EM economies.

That said, there is virtually no appetite (politically or

economically) for renewed large-scale lockdowns

and the base-case assumes that stringent policies

continue to be cautiously reversed, permitting

consumers and businesses to gradually return to

something akin to ‘business as usual’.

To the extent that the non-zero odds of a return to

March-like conditions can be diminished — for

example, by indications that the contagion is coming

under control or progress is made on the

development of therapeutics — that would present

upside risks to the outlook, and it still appears that

the balance of risks is tilted in this direction.

Undoubtedly, plenty of risks linger over the horizon.

Beyond the pandemic, there is a laundry list of

concerns such as persistent tensions in US-China

relations, the upcoming US election, and ongoing

civil unrest simmering on the backburner. However,

it appears that the global economy is on the road to

recovery; and the path of least resistance for the

coming months will be toward improvement

underpinned by a continued abundance of fiscal and

monetary stimulus.

As such, risk assets appear primed to continue on

their road to recovery from their crisis lows as

investors continue to pare the undue weight

assigned to the worst-case scenario outcomes.

Equit ies + Fixed Income —

Canadian

Equity + Government Bonds —

US Equity + Investment-Grade

Credit +

EAFE Equity + High-Yield Credit +

Emerging

Markets +

600

800

1000

1200

1400

1600

1800

2000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020


CANADIAN EQUITIES

INDEX RETURNS (%) – CA$ 1 Mo 3 Mos YTD 1 Yr 5 Yrs 10 Yrs

S&P/TSX Composite 2.5 17.0 -7.5 -2.2 4.5 6.3

S&P/TSX 60 2.2 15.0 -6.3 -1.4 5.2 6.7

S&P/TSX Completion 3.5 25.5 -11.8 -5.1 2.0 5.3

S&P/TSX SmallCap 5.6 38.5 -14.3 -10.1 -0.2 1.5

BMO Small Cap Blended (Weighted) 4.6 36.7 -12.8 -7.9 0.9 3.2

S&P/TSX Composite High Dividend 0.1 8.5 -21.3 -14.4 1.4 5.6

S&P/TSX Composite Dividend 1.0 11.8 -11.3 -6.4 4.6 N/A

S&P/TSX SECTOR RETURNS (%) – CA$

Communication Services -2.5 -1.0 -9.0 -6.3 6.3 10.9

Consumer Discretionary 1.9 32.8 -10.8 -10.5 1.4 9.9

Consumer Staples -0.4 11.7 1.3 3.0 8.3 16.2

Energy -4.6 10.9 -30.4 -24.6 -6.6 -2.3

Financials 3.7 6.2 -16.2 -11.0 5.0 8.8

Health Care -3.5 9.9 -30.9 -54.5 -39.7 -3.8

Industrials 1.5 13.2 -3.8 -0.3 10.9 13.8

Information Technology 13.5 68.3 62.0 85.6 33.3 15.1

Materials 4.5 42.0 15.4 24.9 9.1 0.8

Real Estate 3.2 11.7 -20.0 -15.3 3.8 10.2

Utilities -0.7 3.8 -1.7 10.4 10.2 8.7

INTERNATIONAL EQUITIES

INDEX RETURNS (%) 1 Mo 3 Mos YTD 1 Yr 5 Yrs 10 Yrs

MSCI World Index (Net, C$) 2.6 19.4 -5.8 2.8 6.9 10.0

MSCI EAFE Index (Net, C$) 3.4 14.9 -11.3 -5.1 2.1 5.7

MSCI ACWI (C$) 3.2 19.2 -6.3 2.1 6.5 9.2

MSCI France (C$) 6.0 16.1 -15.9 -10.3 3.5 5.8

MSCI Germany (C$) 6.2 26.5 -7.6 -2.6 1.8 6.1

MSCI Japan (C$) 0.0 11.6 -7.1 3.1 3.4 6.1

MSCI U.K. (C$) 1.4 7.8 -23.3 -17.7 -2.5 3.9

S&P/IFC Investable (Emerging Markets) 7.4 18.8 -10.2 -4.0 3.2 3.9

MSCI EAFE Growth (Gross, C$) 3.3 17.1 -3.3 4.5 5.9 8.2

MSCI EAFE Value (Gross, C$) 3.6 12.7 -19.0 -14.0 -1.0 4.1

INTERNATIONAL EQUITIES

MSCI EAFE SECTOR RETURNS (%) 1 Mo 3 Mos YTD 1 Yr 5 Yrs 10 Yrs

Communication Services 4.8 13.4 -7.0 -3.4 -1.5 5.2

Consumer Discretionary 2.1 17.8 -13.8 -5.5 0.9 7.3

Consumer Staples 1.9 9.4 -5.3 -1.7 4.6 8.1

Energy 0.8 0.0 -36.2 -38.1 -3.9 -0.1

Financials 6.8 13.4 -22.4 -18.0 -3.4 2.8

Health Care 0.3 14.2 4.1 19.9 6.0 10.8

Industrials 3.3 17.9 -13.2 -6.4 3.9 6.5


Materials 5.0 23.8 -9.4 -5.3 4.4 3.7

Real Estate 2.0 8.8 -21.2 -18.9 N/A N/A

Utilities 4.6 12.5 -2.4 5.2 5.4 3.5

U.S. EQUITIES


S&P 500 2.0 20.5 -3.1 7.5 10.7 14.0

Dow Jones Industrial Average 1.8 18.5 -8.4 -0.5 10.6 13.0

NASDAQ 6.0 30.6 12.1 25.6 15.1 16.9

Russell 1000 2.2 21.8 -2.8 7.5 10.5 14.0

Russell 2000 3.5 25.4 -13.0 -6.6 4.3 10.5

Russell 3000 2.3 22.0 -3.5 6.5 10.0 13.7

Russell 1000 Growth 4.4 27.8 9.8 23.3 15.9 17.2

Russell 1000 Value -0.7 14.3 -16.3 -8.8 4.6 10.4

S&P 500 SECTOR RETURNS (%)

Communication Services -0.5 20.0 -0.3 11.1 7.2 10.6

Consumer Discretionary 5.0 32.9 7.2 12.6 13.2 18.2

Consumer Staples -0.3 8.1 -5.7 3.6 7.2 11.8

Energy -1.3 30.5 -35.3 -36.1 -9.2 0.2

Financials -0.3 12.2 -23.6 -13.9 5.4 9.7

Health Care -2.4 13.6 -0.8 10.9 8.1 15.7

Industrials 2.0 17.0 -14.6 -9.0 6.7 11.8


Materials 2.2 26.0 -6.9 -1.1 5.4 9.9

Real Estate 1.5 13.2 -8.5 -2.0 N/A N/A

Utilities -4.7 2.7 -11.1 -2.1 10.2 11.3

Market Returns at June 30, 2020 All returns in US $, except where noted.

Sources: Bloomberg Finance L.P., FTSE Bond Analytics, TD Securities, Thomson Financial


CANADIAN FIXED INCOME – CA$


FTSE Canada 91 Day TBill 0.0 0.1 0.8 1.6 1.0 1.0

FTSE Canada Short Term Overall Bond 0.5 2.1 4.0 4.5 2.1 2.6

FTSE Canada Mid Term Overall Bond 1.0 4.8 8.3 8.1 4.0 5.0

FTSE Canada Long Term Overall Bond 3.5 11.2 11.4 12.0 7.0 7.4

FTSE Canada Universe Bond 1.7 5.9 7.5 7.9 4.2 4.6

FTSE Canada High Yield Overall Bond 3.4 7.6 -2.1 1.3 5.2 5.7

FTSE Canada Real Return Bond Overall 2.4 6.2 6.3 5.5 3.4 4.6

SECTOR RETURNS (%) – CA$

FTSE Canada Federal Bond 0.5 2.3 7.5 7.2 3.0 3.4

FTSE Canada Provincial Bond 2.1 7.7 9.1 9.4 5.2 5.8

FTSE Canada All Corporate Bond 2.6 8.1 5.4 6.6 4.4 5.0

GLOBAL FIXED INCOME


FTSE World Government Bond 0.6 2.0 4.1 4.6 3.7 2.4

COMMODITY

1 Mo 3 Mos YTD 1 Yr 5 Yrs 10 Yrs

Bloomberg WTI Cushing Crude Oil Spot Price 10.7 91.7 -35.7 -32.8 -8.0 -6.3

Bloomberg European Dated Brent BFOE Price 11.6 90.5 -38.4 -36.5 -7.8 -5.7

Edmonton Crude Oil Syncrude Sweet Blend FOB Spot 1.5 259.0 -42.5 -40.9 -10.2 -7.3

S&P GSCI Nat Gas Index Spot -5.3 6.8 -20.0 -24.1 -9.2 -9.2

S&P GSCI Copper Index Spot 12.1 21.6 -2.5 0.3 0.9 -0.8

S&P GSCI Gold Index Spot 2.8 12.8 18.2 27.4 9.0 3.8

CURRENCY

1 Mo 3 Mos YTD 1 Yr 5 Yrs 10 Yrs

Canadian $/U.S. $ (% chg) 3.0 9.2 -9.4 -7.9 -3.5 -4.9

Canadian $/Yen (% chg) -0.1 0.1 0.7 -0.3 2.5 -2.0

Canadian $/GBP (% chg) -0.4 -6.7 -2.9 -4.7 -1.9

Canadian $/Euro (% chg) 1.0 2.4 0.1 -1.4 0.1 -0.9

Market Returns at June 30, 2020 All returns in US $, except where noted.

Sources: Bloomberg Finance L.P., FTSE Bond Analytics, TD Securities, Thomson Financial

GOVERNMENT OF CANADA YIELD CURVE U.S. TREASURY YIELD CURVE

-0.1

Provincial government bond performance in the Canadian domestic bond market. FTSE Canada All Corporate Bond, a measure of investment grade corporate bond performance in the Canadian domestic bond market. The FTSE World Government Bond Index (WGBI) is a market capitalization weighted bond index consisting of the government bond markets of the multiple countries.

18

S&P/TSX Composite Total Return Index. S&P 500 Composite Total Return Index. Bloomberg Barclays US Corporate Total Return Index. MSCI EAFE Net Total Return Index. Bloomberg Barclays US Corporate High Yield Total Return Index. Bloomberg Barclays US Treasury Aggregate Total Return Index. MSCI Emerging Markets Net Total Return Index. The Chicago Board Options Exchange Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used. This is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30. (weighted average of 1m2y, 1m5y, 1m10y and 1m30y Treasury implied vols with weights 0.2/0.2/0.4/0.2, respectively). The Citi Economic Surprise Index measures the pace at which economic indicators are coming in ahead of or below consensus forecasts. When the index is negative, it means that the majority of reports are coming in below expectations, while a positive reading indicates that most data is coming in ahead of expectations. The composite leading indicator (CLI) is designed to provide early signals of turning points in business cycles showing fluctuation of the economic activity around its long term potential level. CLIs show short-term economic movements in qualitative rather than quantitative terms. OECD+ is an aggregate including the 36 OECD economies and 6 major non-member economies (Brazil, China, India, Indonesia, Russia & South Africa). The MSCI World Index captures large and mid-cap representation across 23 developed market countries. The "Global Economic Policy Uncertainty Index" is a GDP-weighted average of national EPU indices for 16 countries that account for two-thirds of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty and policy-related matters. The Categorical Data include a range of sub-indexes based solely on news data. These are derived using results from the Access World News database of over 2,000 US newspapers. Each sub-index requires our economic, uncertainty, and policy terms as well as a set of categorical policy terms. For instance, articles that fulfil our requirements to be coded as EPU and also contain the term 'federal reserve' would be included in the monetary policy uncertainty sub-index.he "Global Economic Policy Uncertainty Index" is a GDP-weighted average of national EPU indices for 16 countries that account for two-thirds of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty and policy-related matters. The CPB Netherlands Bureau for Economic Policy's World Trade Volume Index is an instrument for bringing together, aggregating and summarizing worldwide monthly data on international trade, covering a sample of countries as large as possible and is sufficient to identify monthly movements at a global level as well as at that of major economic regions. The Goldman Sachs Financial Conditions Indexes are weighted averages of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on a given countries' GDP. These measures are then aggregated by Guardian Capital as a GDP-weighted average of the national. Major Developed Markets include US, Eurozone, UK, Canada and Japan; BRICKS include Brazil, Russia, India, China, South Korea and South Africa. The Purchasing Managers Index (PMI) is a measure of the prevailing direction of economic trends in manufacturing. The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets. The Goldman Sachs US Financial Conditions Index is a weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on GDP. The S&P 500 is an index of 500 stocks designed to reflect the risk/return characteristics of the large-cap universe. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). The MSCI indexes are free-float weighted equity indexes and are designed to measure the performance of large and mid-cap segments of a given domestic equity market. The MSCI Index is a measurement of stock market performance in a particular area. For chart 46, ICE/Bank of America Merrill Lynch US Corporate & Government Bond Indexes for securities with maturities between 1-to-5 years, 5-to-10 years and more than 10 years. For chart 47, Bloomberg Barclays US Total Return indexes tha measure US dollar-denominated, fixed-rate nominal debt issued by the US Treasury, investment grade corporations, and non-investment grade corporate, respectively. The S&P/TSX Composite Index is the benchmark Canadian index, representing roughly 70% of the total market capitalization on the Toronto Stock Exchange (TSX) with about 250 companies included in it. The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. The Russell 1000 typically comprises approximately 90% of the total market capitalization of all listed U.S. stocks. The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. The Russell 3000 is an index measuring the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 1000 Growth is an index measuring the performance of the large-cap growth segment of the U.S. equity universe including companies with higher price-to-book ratios and higher forecasted growth values. The term Russell 1000 Value Index refers to a composite of large and mid-cap companies located in the United States that also exhibit a value probability. The S&P/TSX 60 Index is a stock market index of 60 large companies listed on the Toronto Stock Exchange. The S&P/TSX Completion Index is comprised of the constituents of the S&P/TSX Composite Index that are not included in the S&P/TSX 60 Index. The S&P/TSX SmallCap Index provides an investable index for the Canadian small cap market. The BMO Small Cap Blended (Weighted) Index reflects the stock performance of small to mid-sized Canadian companies. The S&P/TSX Composite High Dividend Index is a strategy index focused on dividend income. The S&P/TSX Composite Dividend Index aims to provide a broad-based benchmark of Canadian dividend-paying stocks. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The MSCI ACWI is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI France Index is designed to measure the performance of the large and mid cap segments of the French market. The MSCI Germany Index is designed to measure the performance of the large and mid cap segments of the German market. The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. The S&P/IFCI Composite is a liquid and investable subset of the S&P Emerging Plus Broad Market Index, with the addition of South Korea.

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A Purchasing Managers’ Index (PMI) is a monthly survey of purchasing managers to determine whether business conditions are improving, unchanged, or deteriorating compared to the previous survey. A level above 50 represents improving conditions, while a level below 50 represents deteriorating conditions, and a level of 50 represents no change from the previous survey period. A Services Purchasing Managers’ Index represents the services sector of the economy. WeBank’s China Economic Recovery Index incorporates geolocation data from cellphones to compare the volume of commutes between home and work to the average volume observed during the first week of January 2020. The CBOE US Equity Market Volatility Index (VIX) measures volatility implied by the prices of option contracts on the S&P 500 Index. A higher level of VIX implies higher expected volatility over the next 30 days.

The MSCI EAFE Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across Developed Markets countries* around the world, excluding the US and Canada. The MSCI EAFE Value Index captures large and mid cap securities exhibiting overall value style characteristics across Developed Markets countries* around the world, excluding the US and Canada. The FTSE Canada 91-day Treasury Bill index reflects the performance of a portfolio that only owns a single security, the current on the run 3-month T-Bill, switching into the new T-Bill at each auction. FTSE Canada Short Term Bond Index, a measure of short term bond performance in the Canadian domestic bond market. FTSE Canada Mid Term Bond Index, a measure of mid term bond performance in the Canadian domestic bond market. FTSE Canada Long Term Bond Index, a measure of long term bond performance in the Canadian domestic bond market. FTSE Canada Universe Bond Index, the Universe Bond Index is the broadest and most widely used measure of performance of marketable government and corporate bonds outstanding in the Canadian market. The FTSE Canada High Yield Bond Index is designed to be a broad measure of the Canadian noninvestment grade fixed income market. FTSE Canada Real Return Bond, a measure of real return bond performance in the Canadian domestic bond market. FTSE Canada Federal Bond, a measure of Canadian Federal government bond performance in the Canadian domestic bond market. FTSE Canada Provincial Bond, a measure of Provincial government bond performance in the Canadian domestic bond market. FTSE Canada All Corporate Bond, a measure of investment grade corporate bond performance in the Canadian domestic bond market. The FTSE World Government Bond Index (WGBI) is a market capitalization weighted bond index consisting of the government bond markets of the multiple countries. MSCI Country/Region Indexes: market capitalization-weight stock market indexes designed to measure the performance of large- and mid-cap segments of the stock market of a given country/region

Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities also are subject to currency fluctuations.

The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates in this letter are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual client portfolio returns may vary due to the timing of portfolio inception and/or client-imposed restrictions or guidelines. Actual client portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Alta Capital Management, LLC. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing.

SUMMARY...Economic Outlook | 1 The COVID-19 pandemic has dealt a historic shock to the world...

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