Thank you to those who were able to join me on the call yesterday morning. For those of you who were unable to attend, I have written a summary of my thoughts below

Hello everyone.  First, I hope you are and your families are all safe and healthy.  It was just over a month ago that we hosted a call during the first wave of this crisis as we were beginning to adjust to social distancing measures and for many of us working remotely.  I would understate it if I said this was a troubling period of time.  This is a situation almost none of us had experienced in our lifetime.  What is the way forward?  How does the stock market perform given the economic crisis that was brought on by the health crisis?  We have been giving this a lot of thought as we monitor the situation carefully.  There were a couple of important data points that we were watching for and I will share this with you today

At the time I was amazed at how quickly people adjusted.  We seemed to recognize very quickly it was important for the safety of everyone to self-isolate and make the sacrifices that come along with that. 

As it turned out, the day of our conference call also marked a low point in the market.  The S&P 500 closed at 2237.  This was an 1150 point drop from the peak set on February 20.  These are important numbers to keep in mind and we will revisit the relevance of this in a moment.

On the call I stated that we would look for a peak in cases in the US and we felt that at the time we saw a peak in cases, the markets would begin to normalize. The peak in cases in the US may be occurring as we speak. Another important fact is the actual number of cases vs the number they were projecting is significantly lower. To me this is a good sign because it is an indication that people were abiding by the shut down and this helped reduced the number of cases. As they open parts of the economy back up again, it makes sense to me that people will continue to comply by the government orders and recognize this as a health crisis. The anticipated outcome could be an orderly opening of the economy that has compliance, monitoring and testing.

I believe the market is anticipating this already. But as the markets recovered, we were concerned about a potential retest of the March 23 lows given that in other periods where the market experienced a 30% drawdown, a retest occurred after the market rallied 25-33% from the lows. The S&P 500 has surpassed 2800 and this represents a 50% retracement of the drop we experienced in March.  In previous periods when this occurred, the market did not retest the lows and in fact it was the start of the recovery.

Why is the market not recognizing the fact that there is going to be more bad news coming.  There were three waves of bad news. 

1. The Covid 19 Health Crisis
2. Social Distancing
3. Businesses, Landlords, Banks, Suppliers and the impact on the economy

The first two waves have already happened and the market reacted with lightening fast speed.  But so did governments, people and businesses.  The Federal Reserve had a playbook from Ben Bernanke’s Fed from the 08 Credit Crisis.  Governments around the world enacted emergency funding to people and businesses being impacted by the health crisis.  People reacted quickly and began to comply with government policies for social distancing.  Businesses in essential services created environments that provided safe work places for employees and customers. 

The third wave is upon us and markets have already begun a recovery.  Many people are asking why?  Isn’t there more bad news to come?

Many have asked me questions about the impact on businesses earnings, unemployment, and the impact on the economy.

So,

1. What about the lack of earnings we are expecting? –  One way to answer this is to think about how a stock is priced.  Investors are looking at the next 15 years, or 60 quarters, of future earnings expected from a company.  Does 1-2 quarters of negative earnings matter when looking at the future value of a company over the next 60 quarters?  I believe that this is what the market is beginning to price in.
2. What about the high unemployment we are expecting? – First, the high level of unemployment will be caused by an explainable event.  This can ease the markets nervousness around very high numbers of unemployed.  Second, markets tend to bottom on jobless claims and not on peak unemployment.  This occurred in 2003 and 2009 and in fact the market had already started a significant recovery by the time unemployment peaked months later.
3. What about the impact of all this on GDP? - Markets tend to go down just prior to a recession and recover during the recession. In this case, the markets may be recognizing that the recession was brought on by an exogenous event and may be relatively short lived. Given the immediate and swift response of the US Fed and policy makers, this could indeed be the case.
4. What if there is a second wave? – If there is a second wave of infections, we are already more prepared.  Technology and science based solutions will be in place and we may not have to completely shut down economy again. 

Will the recovery be U shaped, W shaped or V shaped?  Only time will tell.

However, we have witnessed a decline in assets prices across the board.  Dividend yields have gone up as prices have come down.  These now represent an attractive return relative to risk free assets like T-Bills and GIC’s. 

Another question I have received is about oil prices and the impact on energy companies.  Will this result in bankruptcies and continued low oil prices?

The week began with news that a widely followed crude oil price, called West Texas Intermediate (WTI), fell into negative territory for the first time in its history. It may be worth explaining that there is no single WTI price but rather one for each month in the future, with the upcoming monthly contract being the price that is often the most widely quoted. Oil producers and buyers use these contracts to negotiate transactions - buying, selling, and hedging - of oil on a monthly basis. The price for the May contract (which expired this week) fell below zero. Prices for contracts for future months also fell, but by meaningfully less and remain in positive territory. The driver of the weakness is twofold: limited available storage capacity as inventories at major hubs have grown in recent months and demand that has been extraordinarily weak as a result of the global economic shutdown.

The implications are undeniably negative for the energy industry and Canada, whose economy and stock market remain dependent on oil. But, while negative prices may be new, low prices are not. And sentiment around energy has arguably been very poor for some time. This may help to explain why the energy sector, the stock market, and the Canadian dollar held in relatively well given the circumstances.

In fact, this event could be an inflection point in the oil sector for stocks. The saying goes that the solution to low oil prices is low oil prices.  Ultimately, production will be reduced through production cuts from Saudi Arabia and Russia as well as reduced production from the shale producers in the US and Canada.  An increase in demand as the economy opens up again, will help to balance the supply demand in oil and begin to draw down the stored capacity.  This process will no doubt take some time to play out and we will monitor this closely and make changes to our models to take advantage of this situation.

We had prepared portfolios going into this anticipated we were late in the business cycle.  As early as last Fall, we had increased weightings in Gold and Utilities which are defensive holdings during recessionary periods.  We decreased weightings in Energy and Consumer Discretionary which are normally hit harder than other sectors in a recession.  We rebalanced portfolios taking profits in stocks and allocating to bonds over the past year.  In cases where a person required income from their portfolio, we ensured 6-12 months of cash flow or more, depending on each person’s unique circumstances. 

We have since reviewed all of our positions and have repositioned some holdings over the past 4 weeks to take advantage of the drop in prices. 

In our managed portfolios, we have cash available to allocate further to stocks should the volatility in the market increase again.  All of these measures allowed us to weather the storm brought on by this health crisis.

Each of the changes we have made in portfolios have been done incrementally and over periods of weeks.  We will continue to employ this strategy in order to dollar cost average into positions over multiple trading days.  The goal will be to bring the weights of each position back up to the model weights over time. We will continue to monitor and adapt to this evolving situation. 

In the meantime, we are getting back to business in this “new normal”.  Chan will be contacting you to schedule your Annual Reviews and we plan on getting back on track over the next couple of months if you missed your annual review in March or April.  As we normally do, we are focusing on your Wealth Management plan, your cash flow needs, Insurance, your banking needs, estate planning,

During a period like this, many people reflect on their Estate Plans and insurance needs.  One interesting opportunity is with new insurance applications.  The insurance industry has streamlined insurance applications and in some cases we do not need a para medical to apply for a policy.  This makes now an excellent time to review your insurance coverage and ensure you have the correct insurance in place. 

Feel free to share this with Family and Friends as well.  During this time many people may be underserved by their financial advisors and we would welcome an introduction to any of our client’s friends and family.

I will leave it there for today.

Thank you for your trust in us.  I hope to speak with you all soon and hope to see in person again soon.  

Have a great week.