February 28, 2020
Making Cents of the Markets
Be in the Know
After hitting record highs early last week, North American markets pulled back 9% to 12% in the last week which was the fastest pullback of this magnitude since 2008. The key difference from 2008 and today is that there are no signs of a recession yet. So what happened to create the recent bout of panic selling? Fears of the coronavirus spreading finally took hold of the market as we saw a spike of cases in countries outside of China including Italy, Singapore, and Japan. Given that flights to these nations were still operational, the new spike of cases increased panic around a potential global pandemic as new cases were reported in 47 other countries including the US. Throughout the week, the selling picked up as the growth rate outside of China continued to climb. The positive news is that we saw a significant pick up in volumes on Friday which could signal that a bottom is near.
We expect that the virus will continue to dominate the headlines in the coming months but also believe that fears are exaggerated given that the recovery rate continues to rise above 39% and because a number of large pharmaceutical companies have already started working on a potential vaccine. It took 20 months to develop a SARS vaccination however biotechnology has advanced significantly in the last decade and has much more capital than before to invest in finding a cure. We are optimistic that things will eventually get better but realize that it is still too early to predict the potential effects or duration of the virus. Thus far, analysts have predicted a slowdown in the global economy over the next few months before a bounce back due to pent up demand.
With all of these headlines, did anything else noteworthy happen this week? Of course as we saw a number of important economic data points come in. Canadian GDP slowed in the 4th quarter to an annualized rate of 0.3% which was the weakest growth rate since 2016. This is a bit concerning as we have seen a significant pullback in oil in 2020 from $61 to $45 which represents a 26% decline. Regardless of any near-term bounce, it will take some time for oil prices to recover and we know that this will negatively impact an already weak energy industry in Alberta. To contrast Canadian data, we saw continued strength on the US housing market as prices and new home sales head higher. Low interest rates and a health economy are the catalysts behind these increases. Our conviction behind investing mostly in the US remains strong as the data supports our thesis.
Despite the volatility in the markets, we are quite pleased with the results of our portfolios as we have captured less than half, or a third for some, of the downside of the markets for our clients. We currently hold equity exposures that are 10% lower than our target allocations in all our mandates as we proactively raised cash prior to the peak in the markets. We did so by selling or trimming 9 positions in our portfolios that include companies like Mastercard, Visa, TD Bank, Royal Bank, and E-Bay. We must say that while we expected some market weakness, no one could predict the scope of the latest pullback as it was one of the fastest in history. Regardless, by becoming and remaining defensive, we have not only protected our client capital, but also our confidence.
On top of this, we have not held any companies in the travel or hospitality industries and will avoid them as uncertainty and fear make them risky investments at this juncture. We have also avoided energy and other commodity-based investments that have fallen significantly with commodities due to the global near-term slowdown that is expected. Lastly, we also raised additional cash this week by trimming or selling our laggards so that we can invest our cash soon in market leaders that we deem to be stronger investments for the upcoming year.
Despite any negative news in the near-term, we believe that markets are overextended for a variety of reasons and due for a bounce soon. Given our experience, we will remain disciplined on the sidelines and wait for a bounce in markets before taking any action. If risks of a global pandemic increase, then we will likely increase our cash balance further until we are more confident in market conditions. Risk management separates us from most asset managers. Once markets start to head higher and risks dissipate, we will slowly re-invest cash ensuring that markets are heading higher before bringing our equity allocations back to target.
Chart of the Week
While this week’s volatility can be unsettling, it’s a reminder that equity markets can quickly move in either direction. It also reminds us that we need to remain disciplined during periods of panic and not sell at the worst time. We also understand that pullbacks are normal in the market and that the market usually pulls back greater than 6% one to two times each year. One can see this in the following chart which shows all of the greatest intra-year declines in the S&P 500 since 1980:
Source: Manulife Investment Management
The S&P 500 is approximately 13% off of the recent record highs thus the current pullback is considered “normal” by historical standards. We expect that this is a normal correction and that it will take months to recapture the gains made earlier this year, as previous corrections have taken an average of four months to recover. Understanding the normal volatility of the markets is key in being able to act in a disciplined and unemotional manner so we hope that this provides more clarity for our clients.
Beyond the Markets
I want to thank you all for working with us over the years as we qualified again for the Raymond James Global Top 50. This is the third consecutive time that we are considered to be one of the top teams out of 8300 advisors world wide for the firm! Furthermore, we were one of the four female-led teams to qualify and this was also during a year where I transitioned into motherhood. I am so proud of the support from my awesome team and I want to thank them for their “uber” contribution to our clients.
The conference in Texas this week provided us insight on the future of investing, the political landscape in the US as well as a lot of discussion around the new coronavirus. It focused on providing us with the tools required to provide you with the best advice possible as we move through 2020.
I reflect on our business and have come to a conclusion that it is our passion and expertise that have allowed us to reach the highest level possible in our industry. We appreciate that we are able to take care of you and your family’s financial futures and we take your trust and confidence in us as one of the biggest compliments. We look forward to exceeding your expectations for many years to come!
Take a look here at our latest article from Business in Vancouver’s Retirement Ready Magazine where we dive deeper into how to manage your emotions when investing.
Take a look here at our most recent North Shore News article where we discuss the qualities you should look for in a “super star” financial advisor!
Listen to our latest Making Cents of the Markets segment on CKNW. Listen here.