Not your average bear, report warns

April’s market bounce is likely to fade back into a bear market as investors face months of dire earnings and economic data, according to a report from Richardson GMP.

After markets cratered in March in response to the Covid-19 pandemic and economies shutting down, April saw a significant reverse. The S&P/TSX composite index rose 10.8% last month, and the S&P 500 posted a 12.8% gain.

Markets responded to massive stimulus from governments and central banks as policy-makers effectively closed large sections of the global economy.

Now that data around Covid-19 infection rates are improving and economies tentatively reopen, the policy response will be less substantial, the Richardson GMP report stated.

“So as the policy ‘market boost’ fades, the market will have to absorb economic data that will get worse and worse in the coming months,” the report said.

“Q2 earnings released in July and the economic data between now and then will continue to paint a dire picture.”

The report’s authors recommend taking advantage of April’s rally and reducing equities exposure in favour of fixed-income. The firm increased its underweight position on Canadian equities due to energy sector woes and large household debt.

It recommended increased exposure to Canadian corporate credit.

“The repricing of risk in the corporate bond market has tilted the medium- to long-term risk/reward profile back in favour of investors, making it a more attractive place to be,” the report said.

While the worst of the health crisis and the risk of a liquidity crisis appear to be over, investors are now facing a recession whose end largely depends on the virus’s path. The authors predict “a material hit to confidence” leading to conservative behaviour, potentially slowing economic recovery.

A note from Purpose Investments pointed to how difficult the recovery is to predict because this kind of reopening is basically unprecedented. With little guidance from companies, investors are relying on balance sheets to see which names can outlast the competition, chief investment officer Greg Taylor wrote.

The next big market risk, he said, will come in late summer or fall if the recovery doesn’t take the shape markets have priced in. Taylor quoted Yogi Berra: “If the people don’t want to come out to the ballpark, nobody is going to stop them.”

Investors should brace themselves for a bear market that could last for some time, Richardson GMP said.

“Remember, bears usually last a year or longer and this one started two months ago,” the report said. “While there is nothing average about this bear, we don’t believe it is over. It could be a long summer.”