I hope you are all well and safe at home with your families.  These are exceptionally difficult times and there is a lot of fear and concern out there.  It is important to maintain a perspective and have a long-term view of where we will be in 1-2 years’ time whether you are thinking about the market, economy or our state of health.  I have a deep-seated belief that we will all get through this and when we eventually get back to our regular routines, we remember these times and have an even greater appreciation for the things that are most important to us.

For today, I will discuss our perspective on this and Portfolio Management updates. 

This is an event that I am sure most of us have never experienced before although some of our parents and grandparents may have.  We have had a rapid change in our lifestyle and we seem to be handling this and taking this in stride. Humankind is resilient and this is not going to be different from other times we have faced something like this on a world scale.  We will persevere and bounce back from this.

While the financial market prices in all asset classes are changing at a startling speed, people, businesses, and governments are acting…some faster than others.  People have self-isolated and changed their lifestyle habits seemingly overnight.  Businesses have closed their doors and adapted their workforce to work remotely where possible.  Governments have provided stimulus packages to help people impacted by all of this. 

After weeks of volatility and markets trading on very negative sentiment.  The question many are asking is have we seen the bottom yet.  Of course, we will only know in hindsight the answer to this question but market lows tend to happen in dramatic fashion.  When things seem to be unrecoverable. 

Unlike the 2008 credit crisis, the banking system remains strong and Tier 1 Common Ratios are more solid now than at any time over the past 30 years.  However, similar to 2008, the equity markets are, in part, being dislocated by the credit markets.  Bond spreads have widened significantly in the past week as liquidity in trading has dried up.  Even US Treasury Bond spreads have widened to abnormal levels.  In a bit of irony, the same reason the bank’s capital reserves are stronger than ever, is because of their reduced bond inventory and bond trading activity.

Given that the virus is the main issue right now and it may be weeks before we get clarity on this issue, we would expect market volatility to continue.  We will watch the statistics carefully and we should begin to have a clearer picture of how this will play out in North America.  Markets do not like uncertainty and once this uncertainty is removed, it is likely markets will move higher even with the specter of a recession on the horizon that was caused by the virus. 

What have we done to prepare for this?

Over the past 12-18 months we have been discussing with you the fact that we were late in the cycle and the risk of a recession was higher than in the past 10 years.  Although, it was not expected that a virus could cause the next recession.  Regardless of the cause, we had been rebalancing portfolios back to strategic allocations.  We had rebalanced equity portfolios to raise cash for monthly income if you were taking an income from the portfolio.  In some cases, and where appropriate, we established annuities to provide guaranteed income to cover fixed expenses.  We had reduced our allocation to energy and financials and other cyclical stocks in favour of telecommunications, utilities, and some gold.  This activity may have realized capital gains in taxable accounts in the past 2 years.  We will be considering tax loss harvesting to reduce taxes and reposition the portfolio for a rebound in the equity market.   

At the outset of this, we immediately sold a Canadian and US equity ETF in two of our model portfolios to reduce our equity exposure and increase cash positions.

The other question we are asked is what can I do to take advantage of this market dislocation?

The answer to this question depends on a few factors that would include:

Your risk tolerance?

What stage of life are you in?

Are you drawing income from your portfolio?

Do you have cash to invest or will you be borrowing?

Each person’s situation is unique and we consider these questions as we review the strategy for your specific account.  We have prepared for this type of market by gaining a deep understanding of your risk tolerance, income needs, short and long-term goals.  This is the primary function of your in depth Annual Review Meeting and the Financial Plan that we have built for you.  The combination of our disciplined process and the talented professionals on our team at Shorer Wealth Management, have helped prepare us for this type of market.  We are in a position to make informed investment decisions based on your specific needs. 

Where we have cash and you are a growth-oriented investor, we would be cautiously and selectively allocating cash to the equity and fixed income markets.  Our strategy would be not to try and pick the bottom of the market, but instead, do many smaller rebalancing trades to get back to the target weight in these asset classes.  Many clients have transferred cash from their bank accounts to their investment accounts and have tasked us with allocating this in a tactical way while markets are presenting this opportunity.  If you have cash to invest, please contact us and we can discuss this strategy in more detail.

For a balanced or income-oriented investor, we would look to rebalance from fixed income to equity at some point as part of a disciplined investment process.  We used this strategy very effectively after the market bottomed in March 2009. 

Looking forward, the path is no doubt murky and will remain so until we get a sense of the peak of COVID-19 cases. If we make some simple assumptions, however, we can get a handle on market valuations and if they make sense in an environment of very low interest rates, a coming wave of fiscal stimulus and the likelihood of a material bounce back in economic activity once the virus abates. 2020 earnings numbers don’t mean much right now as they are changing almost hourly and many companies are pulling their guidance. It is all about 2021 at this point.

In a world of ultra-low interest rates, monetary stimulus and governments determined to do “whatever it takes” to conquer COVID-19, what is a reasonable price to pay for the future earnings 1-3 years out? Time will tell, but historically markets have performed quite well on a 10-year period after suffering the type of declines we have seen thus far.

…while we cannot control the market, we can control our reactions to it

The market is our partner in building wealth and income over time, but it can be a very unreliable one at times. That has its downsides, as it means we will see volatility in prices well in excess of fundamentals, but it also creates opportunities for investors holding balanced portfolios. The advantage of being invested in public markets is that portfolios are liquid, meaning it is easy to sell the underlying securities and turn them into cash. The downside of this is that a price is put on our portfolios in real time every business day, which can be unbelievably stressful. The key is that we get to choose if we transact at these prices or not. These are challenging times for investors, keeping an eye on a time frame 1-3 years out is difficult when the media is spreading fear everywhere. This causes us to naturally shorten our time horizon and evaluate results on a day by day basis, when just the opposite is needed.

In conclusion, I would like to thank you for your patience and understanding as we work diligently to ensure we make the best possible decisions in this rapidly evolving environment.  To this end, I would ask you to direct emails and calls to Chan Wall and she will direct them to the person on the Team who will be best able to handle your request.  The information flow is extremely high right now and my primary function will be to digest this news flow and how it might impact our portfolios.  Paul will be assisting me to make changes to the portfolios as needed and communicate these changes to you on a weekly basis. 

If you have specific questions about your portfolio, please contact Chan and she will direct your inquiry to myself, Paul or Debi.  If you have an immediate trade that needs to be made, please contact Chan by phone at 905-332-2621 and she will either do the trade or forward you to Paul.  As always, do not send trading instructions to us via email.

I will be focusing my attention to managing your portfolios and making decisions with a 1 to 3 year view on the market.  I know that it is important to communicate with each of you during this time, but these exceptional times require exceptional changes to how we normally do business.  I feel my time is best used to keep a close eye on all our investments and maintain a big picture view.  I will open up my schedule after 4:30 -6:30 pm to return your calls and have conversations about our thoughts on the market.  If needed, I will call you on Saturday mornings between 8:30 and and 11:30 am.  If you would like to schedule a call during one of these times, please contact Chan and she will arrange our schedules. I will put out more frequent emails and be sure to check back at our website for blog posts.

Stay healthy, practice social distancing and self-isolate. Impress on your kids and grandkids that the less we move around, the faster we can contain the Pandemic.

Thank you again for the trust and confidence you have placed in us and we appreciate how this impacted each and every one of you.