Market Update - Looking Forward

As we all navigate through these unprecedented times in our modern-day era, I am consistently asked how I can be optimistic and, by extension, think it’s a good idea to buy stocks in this environment?

I am guessing most of us have heard the following opinions or have read the following negative headlines:

1. We are in a recession – this could be the worst recession of all time.
2. The economy will be challenged for a long time.
3. No one knows what this world will look like going forward – we will all interact differently.
4. The stock market moving up from its lows is a head fake; everyone knows it is going back down again.
5. The experts are telling us the virus is going to fire up again.

I could probably stop there as I am sure the list is, in fact, unending. I think it is essential to state that it is beyond reasonable that people are forming many of these opinions given the health scare, general nervousness and speed with which all of this has unfolded. This has been a very jarring experience, and to understand what is happening, we all reach for information… unfortunately, the information through a lot of the conventional sources doesn’t seem to be balanced.

A lot of our friends and neighbours seem to have bought into all the negative and made emotionally infused investment decisions. In March of this year, Canadian investors pulled the most amount of money out of mutual funds ever. Double, in fact, the previous withdrawal record of December 2018. That was some bad timing as history has shown us that when retail investors (that’s all of us) vote with emotion, markets put in their bottom. I have sent emails outlining the amount of wealth destruction that occurs when you miss even a few of the best up days in the market.

The goal of providing quality financial advice is to weigh out the pros and cons of all decisions, and I have found that it starts with assessing the various probability of outcomes for investors. Once you look at all the probabilities, you then use data (some historical, some current and some extrapolated from other parts of the world) to start assigning which possibilities are the most likely. Sounds pretty exciting, I am sure.

In contrast, when I hear individuals on t.v. tell me what they definitively know will happen next week, next month or this winter, I find it interesting that they were blessed with such a great crystal ball; I wish they could have been so definitive on telling us about the global economy having to be shut down. Thus, the possibility exists that no one’s crystal ball is perfect and that we can accept that a range of outcomes is possible, some good, some bad and a lot in the middle. The more we continue to filter actual information (not opinions), we start to come to some conclusions based on the data and information that has no emotional attachment to it. We now have balanced information.

Based on the reading and the facts that are provided to me from multiple sources I have a set of probabilities that are established (don’t worry, I won’t share all elements of them), but here is what the outcomes with largest probabilities are telling me at this time:

1. We are in a recession, but an exogenous event has caused this. The policymakers and central banks have set a new land speed record with how much “punching power” they have delivered to offset the short-term damage this recession is causing – growth is typically slow coming out of recessions, and this looks to be following that same trajectory.
2. Lower for longer interest rates will continue to force investors and money managers in the coming months to look beyond Cash, GIC’s and parts of the bond market as rates of return below 1-2% will not suffice to fund financial goals. In our financial plans, we are now using age 95 as life expectancy, and it won’t be long before we start using 100. While most clients push back on that kind of time-frame, people are living longer and requiring more significant amounts of money to fund that. While stock market corrections feel like the most destructive financial forces, for investors like us who stick to an overall plan and maintain a strategy, this is not the case as history has shown. We benefit from corrections as we can capitalize on the opportunities presented to us. The data tells us the biggest risk to households going forward is becoming underfunded in their ability to pay for an independent lifestyle throughout retirement.
3. With pension plans (like the CPP) lowering bond weightings and adding more to equities and other investment classes, I believe investors should be taking note and following suit. CPP is not guided by emotions or day-to-day movements in stocks or bonds or real-estate or gold… establishing different buckets of investments is akin to managing risk. If we make our focus on managing risk, we create a better chance of not being derailed when risk shows up.
4. With $15 trillion+ of new dollars printed globally (on top of reduced interest rates), policymakers are helping to support the economy and protect against deflation (prices going down). This has the possibility of fuelling inflation going forward, and in inflationary environments, the stock market is one of the better places to protect yourself.
5. With government and central bank balance sheets expanding as rapidly as they have, we are putting the global economy at risk down the road to other shocks. I would expect that once we are entirely through this pandemic, it would not be logical to base decisions on government spending… austerity will have to kick in at some point, and that means we could see slower growth going forward from most economies.
6. Our focus on growing the amount of U.S. companies in portfolios and on the technology industry seems to be reinforced. You are now buying U.S. dollars over $1.40 CND as I highlighted some time ago our commodity dependant country continues to feel growth pain going forward.

The portfolio’s I manage entered 2020 with one of the most conservative asset mixes I have run since joining this industry. While short-term, we have experienced some volatility; this “dry powder” has helped buffer a lot of the market volatility and given us the ability to take advantage of this financial opportunity. While predictions and opinions are there for the taking, that data is telling me that at this time, the stock market offers less risk than many other investment opportunities that could be considered. We have the power of governments and central banks on our side as they have a vested interest in the economy and stock market getting back on track.

This doesn’t mean that every company or industry or even the stock market will have a smooth ride from here. It does mean that even if growth picks up more than we expect or more slowly than our base case, the continued “melt-up” in stocks should continue, it could just be quicker or slower going. At this time, based on various scenarios, stock markets offer compelling risk-reward relative to a lot of other investment options that exist. As I stated in the previous paragraph, we came into 2020 with a lower equity weighting, so I am not always a fan of being the most weighted to stocks all of the time. The data helps guide me.

We joke in our industry about a certain t.v. commercial on Canada’s business channel (BNN) from a discount broker that, for the last year, continues to ridicule us as professionals. It likes to highlight that you can buy ETF’s or buy stocks yourself… it’s a new era with access to information, why would you ever need a professional to help you?? I recon my accountant and my dentist and quite frankly my car mechanic (because I think you need an engineering degree to change the oil nowadays) are grateful they don’t have to listen to that kind of “ribbing” to their industries.

We get a pretty thick skin in this role, which allows us to joke off those types of things (and the apparent 2-hour wait that they forgot to include in the commercial to get through to someone at that particular brokerage house). Still, I am reminded by the $18+ billion that investors in Canada pulled from their long-term investments in March, that not everyone is well suited to navigating financial markets on their own or has perhaps not chosen an advisor who focuses on trying to manage risk. Chasing certain types of investments or different investment products and being too focused in any one area is usually a recipe for disaster, as they can invite in emotion. The most powerful tool an investor has is their ability to know themselves know what causes them pain and joy and know when to ask for help and when it’s not needed. If you have been “extra rattled” coming through this market correction, you may want to look at the factors that have contributed to that and address those going forward. There will be more market corrections, and if you are not set up to take advantage of them, you may be leaving a large financial opportunity on the table.