October 5, 2020 | Confidence-Crushing Capital Blows Still in Motion

On August 9th, I noted here that the US dollar index (DXY) was looking oversold and that a hold in the 92 area could signal the next round of ‘risk-off’ in an ongoing bear cycle for global markets.  From a closing low of 92.14 on August 31, the dollar index has strengthened since and closed September at 93.88.

In Canadian dollar terms, greenback strength is shown below in my partner Cory Venable’s chart (green arrow), along with the accompanying rollover in risk assets priced in U$–gold, copper, oil and the S&P 500.  Macro forces continue to have the upper hand amid the worst global recession since the 1930s.

Caught in this, Canada’s TSX (below in black) is also looking piqued, with all the largest sectors–financials (in blue), energy (in brown), gold miners (gold), materials (orange) and REITS (in green)–seeing outflows and price weakness in September.

Over the last 13 years, the risk tolerance and time horizons of aging asset owners have come in significantly, with volatile ‘buy and hold’ efforts increasingly counter to financial and mental stability.  Companies are cutting and suspending their dividends at a record pace, and even those received are insufficient offset for the capital losses mounting.

The art of this is to stay defensive, calm and prepared to buy income yielding assets when the masses are liquidating in panic.   March offered a patch test but was too fast and shallow for the multi-month, confidence-crushing body blows needed.  In the meantime, treasuries and cash-like deposits will continue to outperform equity allocations.

Danielle Park October 5th, 2020

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