Markets Pause Losses, Dow Over 20k

Monitors displaying stock market information are seen through the window of the Nasdaq MarketSite in the Times Square neighborhood of New York on March 19.

 Photographer: Michael Nagle/Bloomberg

After a rough day in the markets yesterday, today's session was a welcome pause, if not an inspiring rally. Here's the headlines:

• The Dow Jones Industrial Index is back over 20,000, closing the day at 20,087.19, up 0.95% on the day.

• The S&P/TSX Composite Index rose 3.83%, driven by gains in health care, energy, and consumer discretionary sectors.

Some of the big losers today were airlines and aircraft manufacturers, as they are being hit hard by an almost complete stop to their costly business:

• Air Canada is down 5.81%, after briefly trading above yesterday's close. 

• Boeing is down 4.1%, after asking for a bailout yesterday 

Bailouts for the aviation industry are a hot topic right now. On one hand, companies like Delta are coming under fire for billions in stock buybacks over the last few years. On the other, commercial aviation is a huge part of North America's transportation infrastructure, and allowing it to crumble now would surely hamstring the post-coronavirus recovery. A middle ground, bailouts from cash-rich private equity leviathans like Apollo Global Management, is an interesting scenario to think about.

How will we know when we've reached the bottom?

Obviously, there's a fortune to be made in picking the bottom of this market. Once share prices start to recover, gains will likely be made very quickly, and many analysts are calling for a "v-shaped" recovery.

The trouble is that markets are unpredictable: there's no way to know for sure where the bottom is. The market will have strong rally days all the way down, and the Dow will continue to draw a sawtooth graph:

Source: Bloomberg, March 19th

There are two markers that will indicate when we've reached the bottom: a solution to the COVID-19 pandemic, and a period of stabilty. The first is obvious, once news comes out that we're out of the woods, markets are likely to rebound quickly. If you have a vaccine to COVID-19, please: invest heavily, and then announce that you're making your formulation open-source.

A period of stability will indicate that markets have settled at a support level. The bottom is unlikely to be marked by a violent upswing after a string of losses, but a gradual creep up after a quiet period.

Our Outlook

If you've been reading our content for a while, you'll be familiar with this message: dividend yields on blue-chip stocks are remarkable right now. Focusing particularly on Canada's banks, check out the portfolio below:

Source: Thomson ONE, March 19th

That's a big list, so let's break it into tiers. In the first, we'll have RBC and TD as your largest, highest quality names. Each has well over a trillion dollars in assets, each has relatively low exposure to oil in their loan book, and each has a dividend yield just over 5%. For conservative investors, this tier is most appropriate.

We'll put Scotiabank, BMO, and National Bank into another group. These names have all been hit harder than Royal Bank and TD, and thus have more upside potential should the market turn around. The dividend yields in this group are a little higher, as are the risks and exposure to oil. For investors who think that COVID-19 will be solved quickly, this tier is most appropriate.

CIBC offers the highest dividend yield, but also the highest risks. Some investors are comfortable with the higher risk, and investing in CIBC is a great choice for them.

We should note that we assess the risk of dividend yields being cut to be very low. Even with a 25% drop in earnings, all the names in this group can comfortably sustain their dividend payout ratios. Even as the dividend payout ratio approached 100%, which would be a truly dire earnings scenario, we believe that most banks would not cut their dividends.

If you'd like to talk about these events or discuss your portfolio, don't hesitate to reach out to us at 604.643.0101.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.