These strange times continue to amaze me as much as they amaze the families whose wealth is entrusted to my management. No amount of study – of economic commentary and market forecasting – ever prepares us for really dramatic events, which always seem to come at us out of left field. Two aspects stand out as more “novel” than the pandemic itself (which has ample historical precedent). The first is “volatility suppression,” a concept I will try to explain that is the product of current emergency government policies. The second is the degree of difficulty that investors face who want to behave reasonably and prudently. Steadfast investor behavior is never easy, but it is harder when financial market prices seem disconnected from economic reality. We have to trust the well-established historical fact that those who own shares of the profits always own the greater share of wealth in the future. In the spring, the challenge was not to sell in the face of falling stock prices. In the fall, the challenge is not to sell in the face of stock prices that keep rising for reasons that seem perplexing or counter-intuitive.
Volatility suppression happens when government central banks intervene using tools like “quantitative easing” to force interest rates to unnaturally low levels. New this time are programs like CERB that send out money directly to workers and businesses to offset lost income. The idea is that a recession can be rendered shorter and shallower by applying such shock-absorbing methods. A pleasant byproduct is the suppression of stock market volatility. The swift liquidation of stocks that occurred in March reversed course almost immediately once this cocktail of central bank painkillers and steroids was administered. As a result, some stock market indices like the NASDAQ are making new all-time highs, which is hard to accept when so many are unemployed and normal life still seems far from sight. But when dividends on stocks are so much higher than interest rates on bonds, the implied value of stocks is higher. Investors always have to pick their poison, and 4% dividends are much better than the 0.61% rate paid by the Government of Canada 10-year bond. Let me add that people are reasonably concerned that cash is no safe haven if governments around the world are printing it like mad. Time will tell whether volatility suppression works to make us better off in the long run. (For the record, I am dubious.) But right now it means that the economy remains in a funk but asset prices (including stock prices) remain very high. Those stuck in cash have missed out and may never recover.
This leads to the dilemma about what to do now. I know it’s hard to stay fully invested when financial market values appear to be disconnected from fundamentals. But staying on course with a long-term plan is absolutely the right thing to do now, as always. Sticking to plan has gotten us to the very strong levels of absolute and relative wealth we now have. The market cannot be timed; when necessary, we will ride out bad markets. Meanwhile, good companies can adapt to changing circumstances. I will continue to seek trading opportunities and to leverage my relationships with top equity research analysts to find the right stocks. We are well ahead of the pack and I am determined to keep it that way.
Mark Lloyd, Ph.D.
Vice President & Portfolio Manager