March 20, 2020
Making Cents of the Markets
Be in the Know
This past week has been eventful to say the least as many of our lives have been significantly impacted for the coming weeks. During this time, we have remained focused on becoming more defensive as we have you and your families in mind. We understand the high level of stress that many are going through with increasing city-wide shutdowns and an escalating fear about one’s personal health. We are in this together and we will get through this as humanity has always done in the past. We are available to talk with you if needed as your thoughts and concerns are always very important to us.
On the positive side, we saw significant measures being taken by global governments and central banks as they began to implement mass fiscal stimulus back to businesses and individuals affected directly by the global pandemic. In Canada, Trudeau announced an Economic Response Plan that will provide up to $27 billion in direct assistance to Canadians and businesses affected while also deferring a further $55 billion in tax revenues. This funding will be critical in supporting business continuity so that the impact of the virus remains transitory in nature and that the economy can get back on its feet sooner than later. It is estimated that the global response from the US, Europe, Japan, UK, and China add up to at least $1.4 trillion thus we are optimistic that markets will pull through this (eventually) given this strong coordinated response.
Markets continue to remain under pressure and finished the week at recent lows as buying interest remains low given high levels of uncertainty. We continue to raise cash and take less of the downside as the situation develops as we understand that irrationality and fear are playing a large role in the latest decline. This is because many investors who are in passive strategies and follow a buy & hold mentality are selling all their investments and moving to cash, locking in the loss, and creating more selling pressure on the market. Smart money remains patient on the sidelines as they view the selling as a future opportunity and await more certainty around how long the global economy will be affected. We remain grounded with a high level of cash and a plan to get more defensive if things get worse.
We continued raising cash at the start of the week as we have sold off most of our global and Canadian equity exposures and remain focused on the US, given the relatively stronger and diversified economy. We have now sold most of our external fund managers who do not raise as much cash as we do given that it is critical to protect our clients from any further weakness. While defense is important today, we believe that the US economy will bounce back and plan to re-invest most of our cash there once we deem suitable. But we know that the world will be a different place once this is said and done and we recognize that the types of companies we will add into the portfolio will likely be different than the ones we had back in January. We are actually looking forward to the opportunities in certain sectors and the dividends that will come along with them. Many very high quality companies are now yielding, 5% plus – we haven’t seen these types of yields in years.
We continue to have a plan A and a plan B. Plan A is to continue to hold what we currently have as we have a significant amount of cash in the portfolio and be prepared for when markets begin to recover. Plan B – if markets continue to deteriorate we may have to raise even more cash through selling our 3rd party managers. We don’t believe in panicking as your portfolios are in good well known companies but we have these plans so that we can get you back to where you were as soon as possible. We have managed clients through many crashes or corrections before and our strategy worked then and we believe will again. We just need to be patient and calm and understand that some things are out of our control but that logic will prevail at some point again – likely within months – not years.
We believe that we are closer to a near-term bottom as the markets have basically priced in a recession but it is too early to call that at this point. The next few weeks are critical in terms of the escalation of the virus and if it can be somewhat contained in the US and Canada. We plan to up-grade the portfolio for the months ahead as any recovery at this point could be sharp and quick. We can assure you that we have plans to become even more defensive if markets head lower.
We continue to assess all our investments and believe that the recent selloffs incurred are not warranted for all companies equally as many are not as impacted by the temporary shutdowns in the economy. With that being said, we currently remain invested in software companies like Adobe, Microsoft, and Salesforce that sell services that are staples in our lives today. We continue to remain bullish in companies like Amazon and Target that have strong online presences and continue to serve their customers today. Lastly, we also are positive on our telecoms and utilities that have strong dividend yields at today’s prices and whom we believe benefit most from lower interest rates that are expected to remain low for some time.
We believe that the speed and magnitude of the latest decline has been unprecedented as investors sell anything indiscriminately regardless of the potential impact of the virus on their business for 2020 and beyond. This is because selling begets selling and soon there will be some capitulation where institutions come back into the market in a significant way. In this environment, we must remain defensive but rational that calmer hands will prevail as they always do. We are honored to have your trust during these times as we start to look at the strong opportunities that are being created by this selling.
Chart of the Week
Coming into 2020, we believed like many that the year would yield positive returns as global growth was starting to accelerate. No one expected that the global economy would be hit with a pandemic and an oil price war at the same time. These issues couldn’t have come at a worse time as they raised fear and panic to extremes and created the fastest 25% decline of all time. We wanted to illustrate this latest selloff (left) relative to all the past 25% declines in history below:
We highlight this because this is a very rare environment where markets did not decline gradually and show warning signs of a greater decline like usual. Markets have dislocated from rationality and true value because of many near-term unknowns. When there is more clarity, we expect a recovery to begin as the market remains forward looking. We cannot assure a sharp recovery today but are confident with our relative positioning and ability to respond quickly when markets eventually recover. We recognize that big market dislocations create massive stress – emotional, financial, marital, and probably 10 other kinds. These stresses lead people to act bananas-crazy with their money so let that be our opportunity, not our downfall.
Beyond the Markets
Similarly to last week, we are still encouraging all those who can to stay at home and practice social distancing. While it can be difficult, make it priority to keep up with your routines as much as possible and to not let yourself get too bored. That is why, this week we have put together a list of Pinkowski Wealth Management’s Top Five Books (as of March 2020):
- 11/22/63 by Stephen King
- The Nest by Cynthia D’Aprix Sweeney
- The Last Days of Night by Graham Moore
- Shoe Dog: A Memoir by the Creator of Nike by Phil Knight
- The Help by Kathryn Stockett
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.
Listen to our latest Making Cents of the Markets segment on CKNW. In it we talk about oil, investor anxiety, and our plan. Listen here.
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.