Insights: Waiting for Washington

With the Saudi Arabia-Russia crude oil price war erupting along with the increasing number of COVID19 cases emerging in the United States, the global economy is facing the biggest challenge since the great financial crisis (GFC). As we wrote in our market report for INK subscribers and Canadian Insider Club members on Monday, we believe the key issue for Canadian equities would be what  type of policy response we get from the United States.

However, unlike the GFC, we said we would need to see both a public health and economic response. The health response will be necessary to drive down the number of new cases which is likely to grow. While we cannot predict what will be required, we suggested it may involve quarantines of entire areas such as what is taking place in Italy, and prohibitions of attending popular sporting events such as March Madness basketball. On the economic side, we said we expect interest rates will head quickly towards zero combined with a significant fiscal stimulus package. The Fed will also have to get its act together on its inflation targeting strategy.

Once those measures take shape, we expect a similar scenario to unfold as we witnessed in the wake of the GFC where international and economy-sensitive equities will lead the way higher. We are not there yet, but since our Monday report, some elements have started to come into place. Sporting events are being postponed or played without spectators and the Fed is injecting billions of dollars into the financial system to help their pals on Wall Street.

Cenovus Energy is one of many stocks with insider buying during the sell-off

Based on our experience in the GFC, the key signal we will be monitoring is our INK Indicator which measures the number of stocks on the TSX with key insider buying versus those with selling. Insiders are buying and once we see peak insider buying, we expect a major support level for Canadian equities will have been established. Given the likely pro-inflationary policy response coming from Washington, we expect that Canadian stocks may be one of the eventual early winners. However, if it does play out as we expect, the timing is uncertain.