April 3, 2020
Making Cents of the Markets
Be in the Know
Markets had another choppy week with the month end rebalancing (large institutional accounts and funds will reset their asset allocation figures back to targets for month & quarter-end) providing some support for the end of March before selling off as April started. US markets fell back 2% while the commodity heavy TSX managed to claw back 2% after a bounce in oil prices. Volumes decreased substantially as many investors remain on the sidelines digesting any new updates and estimates on how long shutdowns could last in various global nations. Uncertainty still remains as new COVID-19 cases continue to pick up steam in North America but have started to pare off in Europe as most global nations have put in strong measures to slow the spread of the virus.
Oil prices still remain low but rebounded significantly from their bottom. After WTI fell to around $20 per barrel, we saw the price increase over 40% (to $29). The main reason behind the bounce was a tweet from President Trump stating that he had talked to leaders from Saudi Arabia who then talked to Russia and he expected cuts in production soon. Russia denied that conversation but then announced that they are willing to talk if others are willing to make large cuts as well. An alliance of oil producers led by Saudi Arabia and Russia are set to debate these potential moves on Monday but may not put forth any cuts unless US producers reduce their output in tandem. We believe volatility will continue within energy as oil and gas producers are not profitable at current oil prices, especially for Canadian producers who face even lower prices due to lack of pipelines to transport oil efficiently out of the country.
You may be enjoying the prices at the pump (we filled up at 0.89 per litre!) but Canadian Western Select is a problem right now. CWS was down to under $6USD per barrel last week – compared to $20USD for the US light sweet crude (WTI). That alone is an issue because it can cost more to ship it than to fill a barrel. Compounding the problem is that our Western Canadian Select is a blend of bitumen and ultra light oil and some have estimated that the bitumen portion is already “worthless” because the ultra light oil part is worth more – possibly more alone than when mixed – so pricing on bitumen might actually be negative right now (or close to). The producers may still keep the flow going and eat the loss trying to ride out the dip but we’re talking to analysts about it. We do expect a rebound in oil as mentioned but this gives us reason to be cautious.
Otherwise, we received a number of important economic data points which have started to incorporate the effects from the shutdown. Initial jobless claims in the US spiked to new highs, surpassing expectations with over 6.6 million new claims reported. The US unemployment rate increased to 4.4% from 3.8% but only reflects data as of March 12 thus is likely much higher today after taking into account the latest jobless claims. As expected, we have seen the service industry impacted the most as restaurants, stores, and other service-based businesses remain closed. Markets have anticipated these initial shocks lower as they shift their focus to estimating how long global economies remain shut down which is the most important unknown in our opinion.
Given the continued uncertainty, we remain patient and did not take any action this week because we anticipate more volatility in the near-term as economic and corporate data starts to incorporate the negative effects of COVID-19. We continue to closely follow the health of equity markets and are cautious as investors remain “risk-off” favouring safer areas like government bonds, gold, and defensive sectors that include consumer staples and health care. We would like to see an increase in volumes as well as “risk-on” activity which would indicate that large institutions or smart money is coming back into the market. As stated previously, we believe that we will more likely see a W shaped recovery vs. the V shaped recovery at the start of 2019 due to the uncertainty that remains around the timing of an eventual economic recovery.
We remain comfortable with our high cash holdings, bond managers, and remaining equities as we believe that they are well poised to weather any near-term volatility and lead to the upside once markets eventually head higher. Our equities include utilities, telecoms, and software companies that are expected to hold up much better through any economic weakness in the coming quarters as their services are staples in our lives today. We continue to look forward as there are many attractive opportunities in the market which we track daily as we are ready to put capital back to work. These may become more attractive in the coming weeks thus we remain disciplined on the sidelines as we focus on managing risk and plan to position ourselves best for the future. We have been through these environments before and look forward to the coming months given that these opportunities only come around once every 5-10 years.
Chart of the Week
A large part of our confidence in managing risk and remaining calm during challenging times comes through experience and studying past environments. We are in a bear market which is any decline of approximately 20% or greater from the recent highs in markets. When we look at bear markets in context of history, we split them up into those that occurred with and without out a recession. All of the recessions in the US market are shown in the chart below and split into those two categories:
As seen above, bear markets tend to be much deeper when we encounter a recession. We may have seen the bottom but are open to the possibility that another low in the market will be reached as the average bear market with a recession was -39.5% vs. the -35% decline we have encountered thus far.
Beyond the Markets
As most of us are keeping indoors, here’s a list of 50 fun ideas to make the most of your time! With suggestions such as filming your own cooking show, having a movie marathon, and fixing the fixer-uppers, these ideas will spark up your imagination and help you stay active. Click here for the full list.
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners a market update and discussed Canada’s stimulus package as well as available government support. 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.
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.