The stock market is not the economy, and other lessons from 2020

By Daniel Spencer, CFA 15 January 2021 6 min read

Written by Daniel Spencer, CFA, CFP and Ralph Jaglal, CFA, MBA on behalf of Private Investment Counsel, who believe in a holistic investment counselling approach to helping high net worth clients.

The last quarter of 2020 closed out a long and difficult year for many, and you would be hard pressed to find someone upset to see 2020 come to an end. We often remind clients that the stock market and the economy are not the same, and do not always move in tandem; this past year certainly underscored that notion. Although much of the world ended the year with increased lockdown restrictions, global equity markets closed the year at all time highs. 

Markets were choppy at the onset of the fourth quarter leading into a tightly contested US Presidential election, but returns spiked upwards in November following strong results in late stage COVID-19 vaccine trials. Since the market bottom in March, much of the equity outperformance we saw was fueled by the outperformance of the technology sector as it benefitted from continued work-from-home measures and the investors eager to cash in on the changing landscape.  Now, with normalcy seen on the horizon, other sectors that were more negatively impacted by the lockdowns, are seeing more positive movements in their stock prices. 

Global economic activity is still not back to pre-pandemic levels, but central banks and governments around the world remain committed to supporting the recovery. Central banks have signalled no plans to ease up on stimulus for the foreseeable future. US Federal Reserve Chair, Jerome Powell, indicated that there will not be a reduction in central bank support “until substantial further progress has been made toward the committee's maximum employment and price stability goals.” Further lockdowns, polarized politics, and frothy technology stock valuations are some of the risks to the economic recovery, however, vaccine rollouts, strong household balance sheets, and pent up consumer demand provide a backdrop for continued expansion.  

Some key highlights of the past quarter include:


  • The Canadian unemployment rate increased by 0.1% percentage points to 8.6% in December. The unemployment rate in Alberta was little changed at 11.0%.1
  • Unemployment in the US remained unchanged at 6.7% in December. During the month, job losses in leisure and hospitality and in private education were partially offset by gains in professional and business services, retail trade, and construction.2
  • We continue to wait on fourth quarter results, however, we saw Canadian GDP grow +8.9% in the third quarter, rebounding from a -11.3% record second quarter drop--steepest since quarterly data was recorded by Statistics Canada in 1961.1


  • The final quarter saw strong performance from all major asset classes. Fixed income and equity indices were all positive for the quarter.3
  • October was a volatile but flat month to start the quarter, but despite the slow start, the S&P 500 finished the quarter up 7.26%, the S&P/TSX up 8.97%, and developed international markets (measured by the MSCI EAFE), up 10.98%, all in Canadian dollar terms.3
  • Yield on 10 year government bonds sat at 0.68% at the end of the year. Given these low yields, retail and institutional investors alike are turning to corporate debt to meet return requirements across their portfolios.3

Chart of the quarter

With 2020 bringing us the quickest bear market in history, our portfolios saw larger than average drawdowns in 2020 even though year end performance was above average. These intra-year declines for the CompassTM Portfolios are shown in the chart  below. We can see drawdowns happen at some point each and every year, and the higher the long-term expected return of a portfolio, the larger those drawdowns tend to be. It’s important to remember that volatility is the price we pay for higher returns in the long-run.

Calendar year returns vs. intra-year declines, 2016-2020

Source: ATBIM

Portfolio performance and positioning

With strong performance from all major asset classes in the fourth quarter, the Compass Portfolios finished the year with above average returns. The overweight to credit risk helped the fixed income component of our portfolios to an almost 5% return for the last two months of the year. Although it caused us to lag equity performance for most of the year, our underweight to technology stocks was a benefit during the fourth quarter, as expectations of a “return to normal” gave other sectors a boost towards the end of the year.

Compass Portfolios & ATBIS Pools returns - Series O
Q4 - October 1 to December 31, 2020

Source: ATBIM

Aside from a slight reduction in the high yield bond allocation, there were no major changes initiated by the Investment Committee at ATB Investment Management within the Compass Portfolios in the fourth quarter. With stronger performance from Canso’s Corporate Value mandate, weights were reduced slightly in favour of Investment Grade and Government bonds, to take some profits, and some risk, off the table.

Within the ATBIS Pools, both the Canadian Equity and International Equity Pools saw additional mandates added in December. Both the Mawer New Canada mandate (Canadian small cap) and the Mawer Global Small Cap mandate were added, respectively.

Sub-advisor spotlight

Each quarter we’ll highlight what’s ‘under the hood’ of your investment portfolio by focusing on one of our sub-advisors. Each sub-advisor hired to manage our client’s investment assets is chosen based on a number of factors, including a disciplined investment process, strong internal governance, and an experienced and proven track record, particularly during periods of market decline.

Canso Investment Counsel Ltd.

Firm profile

Founded in 1997, Canso Investment Counsel Ltd. is a privately held money manager, based out of RIchmond Hill, Ontario, that specializes in the management of corporate bonds. canso’s investment technique focuses on the default risk and cash flows associated with each individual issue. They are not simply bond traders, but rather, credit analysts with a deep history of successful fixed income management.

Fund profile

The Canso Corporate Value Mandate is a long standing position within the Compass Portfolios and the ATBIS Fixed Income Pool. The Canso strategy focuses on finding the most inexpensive corporate bonds available at any time. Canso has no term or duration targets,and ranges from being fully invested in high yield bonds to being fully invested in high-quality bonds. Each bond is judged on its own merit and yield spread.This investment discipline means that Canso is typically buying when others are selling. This also means that the portfolio is very conservatively positioned when the market is very speculative.

2020 initiation: Air Canada

Air Canada is the leading Canadian airline operator providing passenger services in the Canadian market, the Canada-U.S. transborder market and the international market. Air Canada also provides cargo services. The company entered the COVID-19 pandemic with a strong balance sheet and was able to raise $5.5 billion as of March 31, 2020 in a volatile market. Canso believes that the company has sufficient liquidity available to weather temporary losses. Although Air Canada has significantly reduced flight capacity, it has been able to quickly reduce costs. We believe that the company will continue to right-size the business until airline travel recovers. Canso rates Air Canada at BB-.

In the second quarter of the year, Canso directly negotiated a 4-year $840 million 2nd lien secured note. The notes were issued at a $2 discount to par with a 9% coupon. The collateral package includes valuable airport slots (Heathrow/LaGuardia/Washington Reagan National), Asian Pacific route rights, Australian route rights, certain real estate and ground service equipment. There is also a limit on additional secured debt on the collateral package.

What are we reading and listening to?

We’ve all heard that to be successful at investing you have to buy low and sell high. With markets hitting all time highs, is now a good time to invest? You will never hear us tell you if it’s the right time to make a quick buck, but from a longer-term perspective it’s always a good time to invest. In Ben Carlson’s blog, A Wealth of Common Sense, he recently looked at market performance after all time highs and shows why investing at all time highs isn’t necessarily a losing proposition.  Investing in Stocks At All-Time Highs. Spoiler alert: 2020 saw 30 “all time highs” during the calendar year.

1 Statistics Canada
2 US Bureau of Labor Statistics
3 Bloomberg

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