As Expected, the Fed Made an Emergency Rate Cut; As Promised, More Defensive Measures Were Taken on the Positive Market Response

Mar 06, 2020 | Nick Scholte


Coronavirus driven volatility is at an extreme. While recession is not a certainty, it is both a credible and imminent threat.

To my clients:

It was a mixed week for North American stock markets with the Canadian TSX finishing down 0.5%; the U.S. Dow Jones Index finishing up 1.8%; and the U.S. S&P 500 finishing up 0.6%.

Given the hyper-volatile market environment the past two weeks, I want to keep things succinct and in point form:

- As anticipated, the Fed delivered an emergency interest rate cut of 0.50% to help fend off the economic impact of coronavirus. I thought the cut might come as early as Sunday evening. In actuality, it came Tuesday morning. Further, Canada also cut rates by 0.50% on Wednesday.

- As I said I would in last Friday’s update, I immediately (Tuesday morning) reduced client equity (stock) positions by about 10 – 15% in the immediate aftermath of the Fed’s action. Markets were modestly up for the day at the time. As the day wore on, U.S. markets turned sharply and finished ~ 3% lower by the end of the day.

- This week’s equity (stock) sales come on the heels of additional equity (stock) sales of 10 – 15% done on Tuesday of last week, as well as the outright sale of oil holdings (Suncor and Canadian Natural Resources on Thursday of last week). Further, a reduction of approximately 15% in equity holdings occurred over the prior 15 months as we entered the later stages of this economic cycle.

- All discretionary clients are now positioned significantly underweight (ranging from 10 to 25% underweight) their long-term equity targets set in their individual Investment Policy Statements (IPS). Variability around the degree of underweight relates to the degree of +/- flexibility clients allowed me in the same IPS. Overall, clients are now positioned very close to the minimum equity weighting permitted in the IPS.

- The big three economic data reported this week (monthly Employment, ISM Services, and ISM Manufacturing) were collectively strong. In particular, ISM Services and Employment were far stronger than expectations, while Manufacturing missed expectations only slightly. However, the collective result is generally irrelevant at this juncture. Next month’s data for these metrics is absolutely certain to be worse as the economic ramifications of events the past two weeks begin to take hold.

- However, the positive takeaway from the big three economic data releases is that they indicate that the U.S. economy was strong heading into this health crisis. This may temper the propensity of the economy to slip into recession.

- To reiterate, equity (stock) strategy I pursue on behalf of clients is to generally give the outsized return potential of equities the “benefit of the doubt” in nearly all economic environments except in times where there is a credible and imminent threat of recession. In my opinion, the economic disruption caused by government and consumer response to coronavirus qualifies as both a credible and imminent threat of recession.

- Frankly, I have been skewing my economic expectations in favour of scientific opinion (virologists, epidemiologists etc.) as opposed to the opinion of economists. Most economists of late have been indicating they have little confidence in their ability to model the economic impacts of the coronavirus.

- All of the above said, if a recession materializes, I believe it will be reasonably mild and short-lived. Again, the economy entered this phase in good shape. There were/are few overt speculative excesses in the real economy. To reiterate what I said last week: we will come out the other side of this.

- The immediately preceding point suggests that opportunity will be presented at some point. Buying at possibly depressed prices be my objective. When it occurs, it is certain to be an uncomfortable decision for clients. But I’m nowhere close to that decision yet. (As a pure guess, I’d speculate the time frame to be somewhere around 1 to 6 months from now).

- Since equity (stock) has already been reduced to near the minimum level permitted in individual client Investment Policy Statements, future defensive measures taken on behalf of clients will largely see rotation from more economically sensitive positions to more defensive positions. This process began last week the increase in Fortis Inc. to a full-weight equity position. The desirable defensive characteristics of this regulated utility saw the share price increase by ~ 7% for this week.

I had many other interesting (to me) nuggets of information I had hoped to share this week (reduced market fears of Bernie Sanders as evidenced by the share price increase of United Healthcare this week; USD $8.3 billion in fiscal stimulus approved in the U.S.; the possibly counterproductive effects of monetary and fiscal stimulus on coronavirus containment; the detrimental impact of coronavirus even if it proves to be no worse than seasonal flu because at the very least such a scenario implies a “double” flu season etc. etc.), but I’ll leave it at my above bullet points for this week.

Bottom line: I have acted on behalf of clients; I will continue to act (as I judge appropriate) on behalf of clients; and I will attempt to remain as transparent as possible with respect to my actions.

That’s it for this week. All the best,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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