It was the ___________________ of times, It was the ____________________ of times (fill in the blanks to suit your outlook!)

October 04, 2022 | Brad Davidson


Well, here we are living in interesting times, again. There are plenty of things going on to rattle one’s nerves, or to use a different metaphor, the markets now have a pretty high wall of worry to climb, and they will. This is seemingly not the worst of times that we’ve ever seen, but likewise, not the best of times either.


We’ll resist the temptation to list all the perplexing and confounding things that are taking place, or expected to take place, and get right to it. Just like hurricanes, and whether we like it or not, market storms are part of our investment and financial lives. They occur periodically and take their toll. As managers of other peoples’ savings, we feel a tremendous responsibility for helping them weather the storm. Approaching 30 years of experience, and the grey hair to match, has taught us a lot of valuable lessons, some from mistakes we’ve made, but also, and just as importantly, from mistakes others have made.


During periods of high emotion, we know for a fact that going with the crowd is not the direction to be going. When technology stocks in 1999 and 2000 were on a tear and building into an investment bubble, buying more and more tech stocks was not the winning formula, but that is what the crowd was doing. When investors were tossing every stock in sight overboard in March and April of 2020, following the crowd was again not the thing to be doing. Warren Buffet sums it up beautifully when he said, “sell when others are greedy and buy when others are fearful”. Not only did he say that, but we know for a fact this year he has been practicing what he preaches in his Berkshire Hathaway fund.


When we complete our financial planning with clients, we determine what rate of return they require on their investments to achieve various financial goals. With that knowledge we discuss asset allocation as part of portfolio construction. The portfolio allocation made to fixed income securities such as investment grade bonds and GIC’s is put in place not to generate above-average long-term returns, it is put there to ensure there will always be a portion of the portfolio that will tend to hold its value in market downturns and dampen the volatility that is hitting the equities in the portfolio. This is an integral component of our long-term investment approach: reduce portfolio volatility so as to make it easier for clients to ride out the market downturns (and also to serve as a source of funds during those periods). Secondly, within the equity component of the portfolio we focus on dividend-paying and dividend-growing companies. (Note that last week Fortis, a company in our core Canadian equity model, raised its dividend by 6%). Holding dividend paying equities means that the investor is paid to wait for the markets to regain their equilibrium and return to their upward trajectory. The proceeds from dividends can be reinvested to take advantage of low markets.


Just as importantly, making predictions, especially about the future, is hard … Markets anticipate, with varying degrees of success, future events. This is why the markets might begin reacting to the suspicions of an impending recession before that recession has actually occurred. Equally, they will anticipate the eventual recovery and economic rebound in advance of it actually happening. Sometimes they will get it right, and other times they will get it wrong. It’s all to some degree guesswork based on incomplete and imperfect information, so degrees of certainty can be pretty low.


The white line in the graph below denotes the Leading Economic Indicator, a proxy for the economy. As you can see, it rises and falls in cycles, and the stock market, the blue line that is hard to see, rises and falls in response, but within the context of the longer-term trend of rising up and to the right. Bet on the long-term trend if you really want to make money, trying to time the shorter cyclical ups and downs is perilous as, in order for one to be successful at it, you have to make two correct calls: one correctly recognizing a significant decline in the markets before it happens, and the second correctly knowing when to get back in at the same or lower level than you got out (see bar graphs below).


Sometimes we get a strong signal that the markets have reached their maximum level of decline. It is something we refer to as capitulation … the last emotionally-charged selling frenzy where effectively the last seller has sold and all that is left are the brave and crafty buyers. This is when the crowd reaches maximum pessimism and all the market commentators are convinced things are going to get even worse (case in point, every commentator interviewed on CNBC on March 23, 2020 said there was little reason for hope, that the globe was going to experience a disaster that it may never recover from). Even if things continue to look dire, seller exhaustion means the buyers take over and the market will rally well before the smoke has cleared (statistically, on average, markets tend to rise 4.8 months, with a range of 1 – 9 months, before a recession has fully run its course).


So, all of the above is a rationale for sticking with the long-term investment strategy, and resisting the emotional response to become a short-term trader.


One caveat to the foregoing, and an admission that at this point it may be too late: investors in higher risk / higher potential reward investments and investment products may very well become intimately acquainted with the true and tangible nature of risk. It is during times of stress that we learn the real risks that come with those types of investments, and often it isn’t a very pleasant experience (the risk we find is most often ignored is the liquidity factor: how easy it is for investors to get their money when the market goes wonky and everyone wants out at the same time?). We learned this lesson a couple of decades ago (in the early 2000’s, to be more precise) and have watched others learn it since. A good investment story can quickly become an investment nightmare if you haven’t done your due diligence that fully anticipates the “what possibly could go wrong scenario”.




A couple of take-aways from the series of bar graphs below. The first is that being out of the market puts one at risk of missing some, or all, of the best days of market performance. The second is the established ability of the broad U.S. equity market to outperform the broad Canadian market over time. Please note, the investment returns generated by the market indices are achieved while remaining fully invested through the downs as well as the ups of the market cycles.

The recent survey of investor sentiment indicates a large number of investors who don’t read our commentaries (red bar). The current level of bearishness is virtually twice the historical average. When we see a reading that extreme, we should not be surprised to see a strong snap back as many of those bears quickly become bulls when the bad news turns out to be less bad than they had anticipated.


And finally, that ray of hope ….


The Presidential Election Cycle is a thing for equity markets. Lots of tension builds in advance of an election, even if a mid-term election. This represents a challenge for investors in the first half of the election year, but eventually that tension eases for the benefit of the equity market. (We hasten to point out that the graphic below is based on an average of multiple years and should not be taken as the actual pattern of any one year.)