Q4 market update: Is there hope for the global economy?

Highlights

• Stocks were strong overall and ended 2020 on a high note.
• Further waves of COVID-19 caused many issues around the world.
• Central banks supported the global economy through difficult times.

(*A quarter refers to a three-month period. The first quarter (Q1) covers the months of January to March. The second quarter (Q2) covers April to June. The third quarter (Q3) covers July to September. And, the fourth quarter (Q4) covers October to December.)

Do the new COVID-19 vaccines offer some hope to investors?

The COVID-19 pandemic has continued to affect the global economy. But the world expects life to return closer to normal once the virus is under control. And, the rollout of vaccines have given investors more confidence.

What happened to the economy when the world went into lockdown again?

The level of lockdown depended on how the virus was spreading in each region. This latest round of lockdowns slowed economic activity, but didn’t stop it.

The economy grew in powerful countries like the U.S. and China. Europe and Japan also made economic gains in the fourth quarter.

Late in the quarter, the U.S. government announced a support package worth about U.S. $900 billion. This package offers financial aid to U.S. citizens and companies.

Most of the major central banks kept interest rates low. They also continued buying assets to support businesses and consumers.

How did global financial markets react?

Global stock markets rose in the fourth quarter of 2020. Investors generally preferred stocks to bonds and cash. Advances in technology helped people adapt to life in a pandemic. These advances helped the information technology sector make strong gains.

The Canadian stock market gained over the fourth quarter. Positive news about COVID-19 vaccines helped stocks move higher. The Bank of Canada’s (BoC) policies supported markets as well. The stronger sectors in Canada included health care and financials.

Canadian bond prices advanced slightly over the quarter. Expectations of rising inflation helped push higher the yield on Government of Canada 10-year bonds.

Markets in the U.S. reached record high levels. Investors believed an economic recovery was ready to take place.

By period’s end, the U.K. and the European Union (EU) agreed on a trade deal. The U.K. is moving toward leaving the EU.

What happened to the price of oil and gold?

The price of oil rose over the quarter. There is potential for rising demand as the economy improves.

The price of gold was little changed in the fourth quarter. Investors favoured other areas of the market instead. Investors usually buy gold when there are market or economic challenges. Optimism about the future of markets meant that investors did not seek the “safety” of gold.

Is Canada’s economy improving?

Canada’s economy grew strongly in the third quarter of 2020 (as reported in the fourth quarter). A rise in household spending was good for economic growth. Greater investment in real estate also contributed.

The potential for a strong global economic recovery was positive for Canada’s export market. These conditions also lifted Canada’s overall economy. The Canadian labour market improved as well. The economy added jobs in the fourth quarter of 2020.

A rising number of COVID-19 cases during the fourth quarter slowed the pace of economic activity. But the rise in cases wasn’t enough to limit growth completely.

The BoC held its key interest rate at 0.25% in the quarter. The BoC expects to leave this interest rate at current low levels. It may raise interest rates once inflation climbs back to the BoC’s target level of 2%.

The BoC also kept in place its program of buying bonds. This program aims to help the financial markets continue to work properly and recover.

Economic outlook: What can investors expect in the future?

The pandemic still poses many risks to the global economy. The world first observed a new strain of the virus in the U.K. It later appeared in other countries as well.

This new strain may spread the virus more easily than the original. Scientists and health officials remain confident that current vaccines in the market will still be effective.

The market expects the global economic recovery to benefit from having a few COVID-19 vaccines available. Investors should be aware that the economic recovery may be uneven. Countries first need to widely distribute the vaccines to their people.

What can we expect to see in Canada and the U.S.?

The labour market in Canada has improved and it will be worth watching in 2021. Unfortunately, it may weaken again in the upcoming quarter as questions about the virus remain. Weaker job numbers may put more pressure on households with high debt levels.

Many households in Canada have built high levels of debt in recent years. These households could face increased financial challenges. This may slow down the economic recovery.

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Across the border, the U.S. Federal Reserve Board (Fed) appears likely to hold its key interest rate at near zero. This low interest rate may remain in place for some time. Rates could rise again once inflation and employment move closer to the Fed’s targets.

The Fed also wants proof that the economy is showing more progress. The Fed will monitor how the U.S. economy behaves after the pandemic.

What will happen to oil prices in 2021?

Stronger economic conditions may support higher oil prices over the first quarter of 2021. A broader rolling out of vaccines will likely lead to more consumer demand. An improving economy should benefit business activity.

The price of oil could move lower if the global economy weakens. A sharp increase in the supply of oil by the world’s largest producers may also weaken oil prices.

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