WORST WEEK, BIGGEST OPPORTUNITY
Last week, the Dow Jones Industrial Average had its worst week since the 2008 financial crisis, dropping 15% from its peak.
For our clients, there is little to worry about. As we have been saying, the market was long overdue for a selloff anyway. Some way, somehow, it was going to happen. The Coronavirus certainly helped trigger it, although we believe that the 2020 race for the White House has been a more important driver of the US stock market than many investors realize. Specifically, the market has been spooked by a modest decline in expectations that Trump will get re-elected, as well as Bernie Sanders’ recent surge in the betting market and the polls (more on Bernie, and Biden, below).
The bottom line is that stocks were trading at premium prices, and now they are trading at more normal valuations.
Speaking of normal, I think this is a normal, healthy correction. We have had four of these corrections in the present bull market (the longest in history), which has existed since shortly after the financial crisis. On each and every occasion, the market rebounded, generating above average returns: an average of 11% within six months.
I am happy to say that last week, our phone barely rang. Most of our clients are not concerned about market volatility, as we have been communicating for quite some time that our portfolios are deliberately conservative, specifically positioned to withstand a correction.
(If you are a client, and you are concerned, please give us a call, because it may be a good time to have a fresh look at your financial plan – to ensure that your risk tolerance and portfolio are still aligned with achievement of the things in life you consider to be most important.)
Our clients know that we are positioned not just to ride out storms like this, but in fact to capitalize on them. Because my team and I have been talking all along about the fact that market gyrations cause mispriced assets: they cause certain companies to be cheaper than they should be, allowing us to buy them at a discount. In a nutshell, a market drop like last week allows us to upgrade our holdings and make our portfolios stronger.
Something else our clients know is that their portfolios have been custom-designed for them, driven by their financial plan. In other words, their portfolios are not the market, and thus are not as risky as the market.
THE DANGERS OF PASSIVE INVESTING
I gave this issue some thought in the January issue of Marche Monthly. In my view, the most significant – and dangerous – investing trend of the decade just past is that investors are being trained not to think. They are being trained to be passive – to essentially buy the market by buying index funds and exchange-traded funds (ETFs), instead of doing their homework to deeply understand which companies they should own and then buy accordingly. When you own a portfolio that is essentially the market, last week you were down essentially as the market was: a lot.
In contrast, since our clients do not own the market, they have much safer portfolios and can capitalize on volatility, because we have the flexibility to shop around for stocks priced lower than we think they should be.
We don’t know for how long the Coronavirus will impact the stock market and world economy. What we do know is this: we will continue to be in a position to capitalize for our clients on any market turbulence.
FEAR THE BERN
In the two weeks before the election of Donald Trump in November, 2016, the US stock market fell for nine straight days, as Trump’s campaign was seen to be gaining ground due to concern over the Hilary Clinton email scandal.
Almost four years later, the market is no longer afraid of Trump, having done extremely well during his presidency, even taking into account last week’s selloff. Instead, the market is fearful of Bernie Sanders.
Why? Simple: because the self-described democratic socialist says he is going to stop exports of coal, natural gas and oil, enact a wealth tax, provide free health care for all, free university for all, and forgive $1.6-trillion of existing student debt, paid for by a tax on Wall Street.
All together, these promises will cost a whopping $2.2-trillion over the next 10 years, raising by a full 10% the US federal debt, which at $22-trillion is already at its highest point in history.
Consider the potential impact of a Sanders presidency on the stock market: overall, analysts at RBC Capital Markets believe that a Sanders victory would be bearish or very bearish (i.e. negative or very negative) for 79% of the industries they cover, and bullish or very bullish (positive or very positive) for only 7%.
If the Democrats want a candidate who does not scare the market, Joe Biden fits that bill, as shown the day after his Super Tuesday victories – when the Dow Jones Industrial Average rose substantially.
TO TECK WITH IT
In the October issue of Marche Monthly, I lamented that the candidates for prime minister were completely ignoring the issue of Canadian competitiveness. Then in the December issue, unfortunately I had to write about the reasons behind the departure of Encana, once the largest company in Canada, to the United States:
“Why would a company move to the US? Many reasons, including the more favourable regulatory environment and a larger market from which to attract capital, which provides more opportunity to grow.”
Here we are just three months later, and Teck Resources, Canada’s largest diversified mining company, has abandoned, at the last minute, its bid to get federal cabinet approval for a proposed oilsands mining project worth roughly $20-billion. In an open letter, Teck CEO Don Lindsay explained that the debate in this country over climate change and energy policy – the uncertain regulatory environment, in other words – was the reason for the withdrawal.
Our position is that the Teck fiasco will make it even more difficult than it already is to attract major investment. As Lindsay put it, “Investors and customers are increasingly looking for jurisdictions to have a framework in place that reconciles resource development and climate change, in order to produce the cleanest possible products. This does not yet exist here today.”
Should we be encouraged by the words of Deputy Prime Minister Chrystia Freeland that the Teck withdrawal should be a “wake up call” for Canada to get its house in order?
Time – probably a lot of time – will tell.
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call, email or visit.
Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated
tyler.marche@rbc.com
1-416-974-4810
www.tylermarche.com