Take Your Pick

by JDH on June 27, 2020

We all know the story.

The markets were humming along, everything appeared to be great, we hit new highs in February.

Then came the Big Bad Virus, and down we went, hitting a bottom on March 23.  Then, when it appeared the world would not end, the market recovered into the first week of June, and from there it has stalled or weakened.  This is best demonstrated in the chart of ZEB.TO – BMO S&P/TSX Equal Weight Banks Index ETF

As you can see, ZEB peaked just shy of $30, and then collapsed to just under $18, a stunning 40% drop in exactly one month.  That has never happened to the blue chip Canadian bank stock index.  It would appear that the correction was over-blown, hence the recovery.  So now what?

As the chart clearly shows, we have a wedge formation, so either the red down trend line will continue, and the bear market rally is over, or the blue up trend line will provide support, and $23 is a great buying opportunity.  Take your pick.

The answer depends on what speculators think will happen in the “real world”.

Canada appears to have the Big Bad Virus under control; the death rate is plummeting, and while there are some new cases, testing has ramped up, so more testing is the obvious reason why we are seeing more cases.  The United States, in some states, appears to be going the other way, with more new cases, leading some to assume that the economy will take a turn for the worse.

The other wildcard is the government itself.  Does stimulus continue, or is it done?

In Canada, the CERB benefit for workers is extended to the end of the summer, so many will take the summer off, but have no choice but to return to work in September.  If the economy is on better footing then, then there will be jobs to return to, and the recovery can continue.

But, if the stimulus ends, and employees are too worried for their safety to return to work, or if the schools aren’t open and parents don’t have daycare so they can’t return to work, or if businesses (like restaurants) have permanently closed and there are no jobs to return to, the economy will not recover, or not recover quickly.

Which will it be?

I don’t know, but if I had to guess, I would bet on human ingenuity.

The human race has beaten every other challenge; we aren’t dead yet.  So, if I was looking for a place to park cash, gold stocks and ZEB would be high on my list.  Currently ZEB pays a dividend of close to 5%, and it’s distributed monthly.  The Big Banks currently distribute about half of their earnings as dividends, so even if their profit drops considerably, they have a lot of room to continue paying their current dividend rate.  So, you buy ZEB, and hold it for two or three years until the recession is over, and it’s likely you have a capital gain, and a dividend.  (If you plan to sell it in two months, it’s a very risky investment; long term, probably safe).

Those are my thoughts.

Let’s keep our fingers crossed.  More next week.