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Mission Critical – Testing Testing

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As the number of COVID-19 cases rose above 4 million worldwide on Monday, Brian Belski, Chief Investment Strategist at BMO Capital Markets, moderated a roundtable discussion with BMO experts to discuss the latest developments in the outbreak. Joining him on the call was Michael Gregory, Deputy Chief Economist at BMO Capital Markets and Janelle E. Woodward, Head of Fixed Income, BMO Global Asset Management. Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss the week’s most recent medical developments.

BMO COVID-19 Insights podcast is live on all major channels including AppleGoogle and Spotify.

As much as governments, businesses and populations stake their hopes on a vaccine for a return to normal in the wake of the pandemic, Dr. Whyte said it was new innovations to make testing faster and more accurate that would be truly critical as Canada and the United States look to reopen their economies, and keep them open.

As of Monday, there had been more than 4 million cases of COVID-19 infection globally, with 282,000 deaths. In Canada, 68,800 cases have been reported, with nearly 5,000 deaths. In the United States, there have been about 1.4 million cases and more than 80,000 deaths, with more than 60 percent of all cases in the states of New York, New Jersey, Massachusetts, Illinois and California.

Testing, Treatment and Vaccines

New developments to combat COVID-19 are occurring weekly, especially with respect to testing.

“Now you can collect your own saliva at home, and send it to the lab for results, and it has roughly the same accuracy as a nasal swab,” Dr. Whyte said, pointing also to a first ever COVID-19 antigen test to be granted Emergency Use Authorization from the FDA.

The antigen test, not to be confused with an antibody test, is similar to a rapid flu test that looks for molecules on the surface of the virus and can be run in about 15 minutes in a doctor’s office or laboratory.

While the test is less accurate than others on the market that take longer to complete, Dr. Whyte said it underscored that the pace of innovation has increased dramatically over the course of the outbreak.

“We had none of these tests in January and here we are in May, with numerous tests out on the market,” he said. “Testing, really, is going to continue to be critically important to containment and mitigation strategies, and it plays a key role in a staged reopening, and in staying open.”


There are at least 50 COVID-19 vaccines in discovery or preclinical stages, but Dr. Whyte said waiting for a vaccine to resume normal life is not a viable option because the process takes too long and is fraught with failures along the way. Moreover, once a vaccine has been developed, it needs to be put into production, which usually involves the construction of new facilities tailored to specific requirements and able to produce millions, if not billions of doses.

“We need to change this narrative,” said Dr. Whyte. “It's not an either or … we need to have a balance and we need to figure out a way to live with the virus, while protecting vulnerable populations, and there's different strategies to do that.”

The Cruelest Month

On the economic front, Deputy Chief Economist Michael Gregory said job losses as a result of COVID-19 have, in the last two months alone, erased two decades worth of job gains in the United States.

“T. S. Eliot said that April is the cruelest month and, when it comes to the economy, this famous phrase fits perfectly,” Gregory said in paraphrasing the famous poet. “The stay-at-home orders and business closures that unfolded during March had their full impact last month, and the April indicators are starting to be released.”

Unemployment numbers for April were released on Friday and, as Gregory put it, “the results were, quite frankly, awful.” U.S. payroll jobs plummeted by 20.5 million in April and household survey employment, which represents self-employed and gig workers, dropped by 22.4 million.

The American unemployment rate now sits at 14.7 percent, the highest since records started to be kept in 1948, and thus, the highest unemployment rate since the Great Depression era.

In contrast, Canadian employment dropped by two million in April, despite the market bracing for a much larger decline due to the more than seven million Canadians who received Canadian Emergency Response Benefit payments. Canadian unemployment didn’t see as much of a spike but still hit 13 percent, just shy of its post-war record of 13.1 percent in 1982.

More to Come

“For both labor markets, April might not mark the nadir,” Gregory said. In the two weeks since April numbers were posted, another seven million initial claims for unemployment insurance benefits have come in.

“It's likely that they will mark another month of net job losses and further increases in unemployment rates,” he continued, “but nowhere near as bad as April.”

The jobs lost will not be easily regained when economies reopen, Gregory said. “We judge that, beyond the next few months, meaningful labor market progress, in fact, may be a lot harder to come by.”

“The bottom line is that some job losses will be permanent,” Gregory said. “And it may take many years to revisit the pre-pandemic lows in jobless rates.”

Market Normalization

Janelle Woodward, Head of Fixed Income at BMO Global Asset Management, joined the call to give her thoughts on the current fixed income market. “With each week that passes, we continue to see signs of market normalization, in terms of fixed income market function, even while significant uncertainty remains regarding the short and intermediate economic impact.”

Global monetary policy has been a key driver of that, she said, pointing at a “whatever it takes” tone with regard to policy.

“The question that remains is, what could and what does ‘whatever it takes’ look like going forward,” she said, “especially as rates hit zero and the Fed's balance sheet could potentially push towards $10 trillion, given the amount of facilities already in place.”

With regards to valuation of investment grade credit, Woodward said the two biggest themes are liquidity and sector level impact, while also appreciating the tone and overall credit risk going into this period. 

The Right Price

With regard to credit, Woodward said the question she is being asked the most is, what’s the right price?

She described a threefold approach to the question.

The first, she said, was to think about credit risk premium in the context of prior cycles and normal markets. The second, Woodward said, was thinking about credit spreads from an implied default rate perspective, also putting these in historical context, including down the sector level. The last piece she highlighted was to consider cross asset class valuation..

“If we make a case that equities are cheap, and flow that through other market segments, it certainly makes the case that there's value to be had in credit segments, including high yield,” Woodward said. 

Markets Wrap

Looking at the stock markets, BMO Capital Markets Chief Investment Strategist Brian Belski noted how Canadian stocks have outperformed their neighbour to the south since the low hit on both sides of the border on March 23.

With more than 70 percent of earnings coming out of the TSX for the quarter, Belski said Canadian-listed equities have shown a positive trend to the upside, exceeding the expectations of many analysts, particularly with respect to financials, communications and energy companies.

“We are starting to see a very, very decent trend in terms of positive surprise to the upside, a little bit more than analysts thought, and this was something that we talked about and warned investors (about),” he said. “I think that's a positive thing that we could see for the quarters to come with respect to Canada.”

Transition from Fear

With respect to the U.S., as markets transition away from the feeling of fear over COVID-19, and look for where growth will come from as the economy opens, Belski said his team remains overweight technology and communication services, consumer discretionary and parts of REITs in the United States, where he sees strong value and growth from a cash flow and earnings stability perspective.

Some retail companies have had to declare bankruptcy in the wake of the pandemic, but Belski said many of those companies were already facing secular problems before COVID-19.

“And so, obviously, with the COVID lockdown to the economy, these companies were going to get hit first, so investors quite frankly should not be surprised that we're seeing bankruptcies,” he said.

Imperfect Pullback

Belski urged investors to refrain from trying to time the market.

“If you try to be too cute, and to pick an area and to time the market and expect a perfect pullback to the March lows, I think that could be, quote unquote, a little too cute,” he said. “We do not think that investors should be trying to time the market and we still believe that, a year from now, stock prices will be higher.”

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Brian Belski Chief Investment Strategist
Michael Gregory, CFA Deputy Chief Economist and Managing Director

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