After a slow start, the second quarter of 2021 saw a dramatic increase in vaccine uptake in Canada, paving the way for the much anticipated reopening. As of the end of June, Canada is now at or near the top with respect to the percentage of population with a first shot COVID-19 vaccination. Second shot distribution is rising quickly. Alberta has targeted July 1 as the date for reopening, with other provinces and territories likely not far behind. While the vast majority of countries have yet to reach their vaccination goals, uptake rates indicate that, if supply allows, many countries may be able to once again enjoy some form of normalcy by the end of the summer. A recent surge in Delta variant cases in the UK shows the potential for a fourth wave, posing a risk to re-opening and something to keep a close eye on.

Considering all of the fiscal stimulus in place and coming down the pipeline, it begs the question as to whether this, combined with increased economic activity from reopening, will spur further inflation. For the US and Canada, both headline and core inflation measures—as noted in the chart—recently rose well above the 2% target of both countries’ central banks. At this point, central banks are still convinced that this inflation will be transitory in nature. Used car values in the US, for example, have risen 29.7%¹ year-over-year due to new vehicle supply shortages. The hope is that these kinds of shortages across many categories subside with reopening and inflation retraces closer to the 2% long-term target. This stance on inflation will allow central banks to remain accommodative for another year or two, in hopes of seeing a full recovery in the job market before needing to raise interest rates.

As markets continued to digest inflation data and central bank activity, mid- to long-bond yields barely moved after the spike seen during the first quarter, giving indication that markets also believe the recent inflation data could be transitory. Bonds overall were up for the quarter by about 1.4%², but still down 3.6% year-to-date off of sharply-rising yields in the first quarter. Low interest rates remain a headwind for future fixed income return expectations with the index at a 1.7% yield.

Stock markets continued to reach new highs during the quarter not just in Canada and the US, but around the globe. Earnings, however, have started to roll in as better than expected. In Canada by year end, earnings are earmarked to be about 20% higher for the average public company³ compared to 2019 levels. US and overseas markets tell a similar story. The bounce in earnings goes a long way in justifying why the recovery in stock markets has been so swift; the S&P TSX Composite for Canada is up about 18.5% since 2019.

The US dollar may have hit bottom this quarter, touching 1.20 in Canadian dollar terms in early June, down from 1.45 at its high in March 2020. This is the strongest the Canadian dollar has been against the US dollar since 2015. This strength is likely a result of the oil price recovery and anticipation that the Bank of Canada is still likely to raise interest rates before the US Federal Reserve.

Over the last six months, three billion vaccinations⁴ have been administered globally; an incredible feat by any measure. While significant progress has been made in managing the pandemic, subsequent waves and closures remain a risk, especially in countries that are seeing low vaccine uptake. In spite of this, markets remain optimistic that the worst is soon to be behind us, as indicated by markets reaching all time highs. While some are cautious about elevated fundamentals, earnings have shown to be resilient, and offer better value than fixed income alternatives. Coupled with continued easy monetary and fiscal policy, this gives us confidence that equities will continue to outperform alternatives. This view is reflected with the modest overweight to equities in the Compass Portfolios.

As the world continues to open up, it is unknown whether life will fully go back to the way it was before. As markets reach new highs—recovering far past where they were pre-pandemic—the easy money has likely been made. Uncertainty about whether stock or real estate valuations are too high, or how best to defend against possible inflation are common themes for today's investor. With trust in our managers to invest in companies that are sustainable and resilient, we believe our investment process will continue to perform, despite post-pandemic headwinds.