April 9, 2020
Making Cents of the Markets
Be in the Know
After a slight pullback last week, markets rallied throughout the week as data showed that we have likely seen a peak in the growth of COVID cases in Europe and globally. The TSX in Canada ended up 9% while US markets closed up around 12% as we are technically back in a bull market with indices up over 20% from the lows. We are still relatively cautious given the unprecedented speed of the moves in the market but believe that this move was a positive sign regardless. We have now gone through the shortest bear market in history as the decline of 35% from top to bottom took place in only 23 trading days. This was followed by the fastest bull market as indices bounced back 20% in just 12 trading days. Needless to say, there has been a lot of emotions in the market as fear based selling was followed by a strong snap back that may have gone further than normal due to “fear of missing out” or FOMO as the millennials like to call it.
Taking a deeper look into the move this week, the strongest sectors in the market were cyclical or economically sensitive sectors that had previously declined the most. These sectors include energy, materials, and financials and reflect that investors are willing to take risk again which is definitely a positive sign as investors were previously focusing their buying efforts on defensive sectors like consumer staples and healthcare. While we are not yet at a stage where we are “all in” on the market, we do believe that it is appropriate to start adding equity exposures in a calculated manner as it is also likely that we have seen a bottom in the market. Volatility remains elevated thus we would not be surprised to see continued sharp moves up and down in the coming weeks as investors still have a lot of unanswered questions such as the length of the shutdown in many global economies and how long it takes for consumers to return to “normal” behavior and spending.
There were a number of economic updates later in the week as Canada lost over 1 million jobs in March as the unemployment rate increased from 5.5% to 7.8%. The US also recorded 6.6 million initial jobless claims this week as unemployment in North America will likely be in double digits at its worst point. The market shook off this bad news as it understands that most of these job losses will be temporary in nature with strong support from the government. Global central banks continue to commit more stimulus as the US Fed increased their stimulus package up to $2.3 trillion to provide more loans and liquidity to financial markets. It is clear that central banks are doing all that they can to lessen the economic blow, save as many jobs as possible, and in turn quicken the economic recovery. Even though the market is forward looking, we expect it to remain range bound in the coming months as it digests negative news and begins to gain a clearer picture of how companies will grow moving forward.
We were pleased with the performance of our portfolios this week as we maintained the majority of our high quality equity exposures through the previous selloff and were able to participate in a good portion of the upside. We remain disciplined in our approach and maintain a higher cash position as we added minimal exposures in bonds and equities this week. This is because we realize that volatility remains high with a fair amount of negative news coming from economies and corporations globally in the near term. Eventually investors will become bearish again creating smaller pullbacks in the market that we plan to use to buy strong companies at what we deem as attractive prices. Many of these have strong dividends as we continue to benefit the cash flow in our portfolios.
Discipline is key in our approach as we were not tempted to step back into the market in a material way after such a strong move in markets. While 2018 resulted in a V-shaped recovery, we still do not expect a V-shaped recovery as we are facing an economic shock and a recession that is likely already here. Despite the strong move this week, markets are still down around 16% year-to-date and show that we are far from being out of the woods yet. We remain grounded in our investment approach and look forward to taking advantage of opportunities in the coming months as the worst is likely behind us.
Chart of the Week
One of the most important aspects of investing is studying past markets to get a better understanding of human psychology through market selloffs in the past. Every period of weakness has a different reason but the human response tends to be consistent throughout time. Of course the recent correction and bounce were historical in nature as we have never faced a global pandemic resulting in economic shutdowns but the market action was very similar to 2 specific times in history. These are the corrections in 1929 and 1987 that are included and compared to today’s market environment as well as the last 2 recessions in North America:
Source – Bespoke Investment Group
One can clearly see the unprecedented move as the last 2 bear markets in 2000 and 2007 were much more gradual as the economy gradually slipped into a recession instead of experiencing an economic shock like today. There were only 2 corrections in history similar to today that included the market crash in 1929 prior to the great depression and the market crash in 1987. There are different explanations to why fear-based selling took place but the commonality is that fear-based selling took place and disregarded true values as investors flocked to cash. The difference that we see that could explain the strong initial bounce is that global central banks have taken massive pro-active measures to provide liquidity and confidence back into the markets. Though anything is possible, we believe that we will follow history and start to move in a sideways range for some time before eventually heading higher.
Beyond the Markets
In this week’s radio, we talked about stages of retirement and wanted to discuss one in particular: Building a New Identity in Retirement. This could be learning new skills, volunteering, learning a new language, reading new books, mentoring someone online, signing up for virtual workout classes. The important takeaway here is to always keep learning. Another example is writing something inspiring – if you’re retired and have lived and learned, share your experience and knowledge with others. One of our clients recently did this and sent us a piece about how everyone can use a little encouragement during this time and we wanted to share a couple lines from it:
Where is your Focus?
Difficult times, like now, reinforced by scary words like “pandemic.” It’s easy to lose our focus. It is difficult to keep our enthusiasm and spirits high when the world appears to be crumbling around us.
We have two choices.
- Run with the herd driven by fear and despair causing us to lay down and quit. The flaw, however, is in a time of trouble, quitting never resolves anything. Quitting with no hope just places us in greater despair and danger.
- Put our heads down and get our emotions in check. Become part of the solution. Be a positive force in the herd to bring a sense of calm, direction and confidence to those around us. Some, when they are faced with a desperate situation, appear to be of the firefighter mentality. When others are running out, they are the ones running into the building. Seek to be a firefighter of life.
These are just a few examples of how we can be inspiring and using our time!
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners a market update and discussed the various stages of retirement. Listen here.