Market Rallies on Worst-Ever Unemployment Claims
Today's trading saw strong gains for the major indexes. The Dow Jones Industrial Index closed up 1351.6 points, gaining 6.4% on the day. The S&P 500 closed up 6.2%, and S&P/TSX composite gained 1.8%.
The backdrop for this strong day of trading is the highest reported initial jobless claims on record. Almost 3.3 million filed for unemployment benefits last week, by far the highest ever recorded and a number that exceeds outstanding unemployment claims. The unemployment figures more than tripled analyst expectations, and form a rather startling chart:
Source: Bloomberg
To say that a strong session is a surprising result is an understatement. The market's perception seems to be that the past month's losses are too severe, and is rallying on the value available, not the news.
Aviation Gains Despite COVID-19 Shutdowns
Since the COVID-19 pandemic started affecting markets, the aviation industry has been among the hardest hit. Demand for recreational or business travel has completely flatlined, and several countries are shutting down international travel. Since the only thing more expensive than flying an airplane is not flying an airplane, airlines have suffered heavy cash flow losses and have started asking governments for bailouts.
It's also aviation companies that have seen some of this week's biggest rallies. Boeing (up 13.8% today), a company that entered this crisis on the back of an ongoing crisis of its own, lost 70% of its value in the last month. This week, the stock has recovered significantly on speculation of a coming bailout:
Source: Bloomberg, March 26th
There are, admittedly, some interesting opportunities in this crisis. Air Canada (up 2.3% today) came into the COVID-19 pandemic with by far the strongest balance sheet of its peers. The company had been accumulating cash (some $3 billion) for strategic reasons, and now looks remarkably prescient in that approach. Since Air Canada does not pay a dividend and does not pursue buybacks nearly as aggressively as its peers, it is uniquely well-positioned to weather the tough months ahead.
Stepping down from the largest names in aviation, there are companies with interesting COVID-19 business cases. CAE Inc (up 0.4% today) is the world leader in simulator and training services, which looks to be a resilient business model while airlines and pilots are forced to maintain proficiency without actually flying. Chorus Aviation (up 10.8% today) earns most of its revenue from fixed-fee contracts with Air Canada, flies small planes mostly domestically, and is currently paying a 12.3% dividend yield.
Market Outlook
Our suspicion is that this week's rally does not mark the bottom of this market. Huge unemployment figures are not the foundation for strong growth in equity markets, and we suspect that future news about the US labor force will be even more worrying. Upwards volatility is still volatility, and we'd like to see some form of stability before deploying cash.
The opportunities we are pursuing all fit the same theme: taking advantage of the dividend yields available from large companies that can still produce cash flow during this pandemic. We've talked at length about the Big Five banks, and will continue to, but we're also interested in BCE Incorporated (formerly Bell Canada). Defensive names like BCE have a clear ability to generate cash flow both during this pandemic and after it subsides, which makes a long-term investment at a lower-than-average price attractive.
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.