In this month’s market review, our Chief Options Specialist, Jason Ayres, reflects on the May market conditions.

The record-breaking rally in stocks continued throughout the month of April, with both the Canadian and U.S. markets recovering half of the losses incurred during the sell off in February and March.

Since the market top halfway through the first quarter, the 2020 narrative has been of two extremes:

  1. The fastest market correction in history, driven by panic as investors ran for the exists due to the global pandemic.
  2. The record-breaking relief rally in which the markets recovered in just over a month, the equivalent of what usually takes years to achieve.

So where do we go from here?

Stock prices are rebounding while earnings expectations are revised lower, and price to earnings ratios are at levels that haven’t been seen in 20 years.

In addition, low interest rates support the move higher, but the outlook remains uncertain and many companies have refused to provide forward-looking guidance.

At this point, three significant uncertainties remain:

  1. We can’t rule out the risk of a second wave of the virus as countries begin to loosen restrictions
  2. We don’t know how long the recession will last and how long it will take to get back to what is considered normal economic activity
  3. We don’t know if the national fiscal and monetary policy response will support the millions of newly unemployed workers.

Therefore, the upside for both U.S. and Canadian markets appears to be very limited for the near term. While technology has outperformed, the major indices have spent the last few weeks consolidating.