March 13, 2020
Making Cents of the Markets
Be In The Know
Before we go into what happened this week, we want to let all our clients know that this has been a very challenging time for all investors given that we just went through the fastest bear market (decline of greater than 20%) of all time. We simply live in a different time where the media has a much stronger presence and effect on the population given the explosion of smartphones and social media over the last 10 years. This has stimulated a fear based environment where many run for the exits and sell all of their stocks indiscriminately, regardless of the quality of the company or exposure to negative effects from the Coronavirus. Additionally, we have seen a widespread panic all over North America in that many are lining up outside of Costco and other big block stores stocking up on toilet paper and canned food. We believe that this panic is not justified and is simply making the situation worse as it creates additional fear and leads many to make irrational decisions at potentially the worst times.
We encourage everyone to remain calm despite the societal panic as markets ended up rallying over 9% on Friday, paring 1/3rd of the latest decline from peak to trough. We understand that many investors globally were moving to very high cash positions this week after markets had declined 30% in 3 weeks. We also know that these investors may be kicking themselves after seeing the bounce back on Friday. This is a real life example of how irrationality and panic leads many investors to sell at the worst times. Those who sold out are now waiting for the economy to improve before re-investing in the market and do not understand that the market often leads the economy, thus will likely have already recovered by the time the economy is back on a solid footing. This is why clients trust us to manage their risks and exposures in these challenging times as we have studied behavioral biases and remain disciplined in order to navigate around any irrationality that takes place.
So with all the noise and volatility, what actually happened this week? Markets dropped 10% on Monday as oil dropped over 25% when Saudi Arabia announced that they were increasing production of oil. This was done to drop the price of oil down around $33 a barrel, which is a level where many North American oil & gas companies are not profitable thus will have to cut investment and production. This drop in production should allow Saudi Arabia and Russia to increase their market share by taking away business from the US. The already fragile market continued lower throughout the week as the negative headlines around increasing cases locally, conference cancellations, Europe travel bans, and sports league suspensions fueled more selling. The market ignored any positive measures taken by global nations to support local economies, including a surprise interest rate cut of 0.5% by Canada on Friday to 0.75%, until Trump spoke to the public on Friday afternoon. Trump declared a national emergency and announced a declaration that is providing up to $50 billion in financial resources to assist with the negative effects from the outbreak. These include millions of test kits, emergency operation centers, waiving interest on student loans, and purchasing more crude oil for the US strategic reserve.
While it is too early to call a bottom, we have observed a spike of volumes over the last week indicating that institutions or smart money have started to pick off stocks at their lows of which they believe are good values. There is still a lot of uncertainty in the near-term as cases locally continue to grow but we are optimistic that we have started the bottoming process in the markets that will take a number of weeks to months to complete before the uptrend resumes.
We do our best to manage risk in all environments as we know that our stop loss strategy works well in normal corrections or pull backs that typically occur over a number of months, not 3 weeks. When markets decline quickly on panic and there are no signs of an upcoming recession, our stop loss strategy is challenged as most of our stocks hit their stops this Monday when markets dropped 10% and were down 20% in 2 weeks. At this time, we sold the remainder of our US banks and Pembina Pipeline Corp which we believe will be negatively impacted over the next year due to the fall in oil prices. We were reluctant to sell the remainder of our companies as we understand that panic based sell offs can recover quickly thus we do not want to move fully to cash and miss any quick bounces.
We are comfortable with our remaining holdings given that many of them should not be materially impacted by the near term effects around the Coronavirus and Oil. We don’t believe that our utilities or telecoms will make less money because most people are working from home. Furthermore, we were already prudent in raising cash before the market top and shortly after as we have sold or trimmed 18 companies this year resulting in much higher cash balances if markets are to eventually head lower. We do not believe that this is likely but understand it is a possibility and have plans to add exposures if markets and the economy look to improve or to become even more defensive if volatility continues and the chances of a serious recession increase. We realize that these times are emotional and challenging for all but that we must be disciplined, and we are honored to be managing your assets throughout.
Chart of the Week
This week we want to focus on one specific chart on the Coronavirus but encourage all to look at all of the charts within the link below in order to fully understand why we believe the selloff is overdone:
On one hand, technology is amazing as it has created so many efficiencies in our daily lives and allowed us to obtain information in seconds. On the other hand, it has opened up the floodgates to being overloaded by information during bad times. The chart below highlights this change as we have seen billions of media mentions in the past 2 months vs. millions for other cases:
This is staggering and likely the reason behind the speed and magnitude of the latest selloff in equity markets. Everyone can look at the live value of their portfolios and then be scared off by negative headlines in the media. We take journalists’ economic predictions with a grain of salt given they aren’t managing money and are motivated to make money by generating clicks that are usually done through fear. If you look at the charts in the link above, you can see that the relative danger of this disease is much lower than most others we have no cures for. We realize that travel has been halted, conferences cancelled, and sports suspended but try to focus on the bigger picture. Which is: these closures are positive for the long-term as it is best that the world works together to contain the growth of this virus, support the economy for any near-term weakness, and then to find a cure. It is easy to get caught up in the daily noise but sometimes it is best to take a walk, get a breath of fresh air, and realize that the sky is not falling and the world will be back to normal eventually (as it always is).
Beyond the Markets
In light of the growing concern regarding the spread of COVID-19, we encourage all who can to stay home when possible and practice social distancing. With that said, we thought it would be a suitable time to share our favourite movies on Netflix that you can enjoy while at home. So grab a cup of tea and peruse Pinkowski Wealth Management’s Top Five Movies on Netflix (as of March 2020):
- He’s Just Not That into You
- The Theory of Everything
- The Blind Side
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.
Listen to our latest Making Cents of the Markets segment on CKNW. In it we discussed the sell off in oil as well as the likelihood of a recession. Listen here.
Take a look here at our most recent North Shore News article where we discuss the coronavirus outbreak and its effects on the markets and investor emotions.