Special Update: Economists are Dithering; I Choose to Listen to the Scientists

Mar 17, 2020 | Nick Scholte


And scientific opinion seems to suggest the current pandemic crisis will continue longer than most believe.

To my clients:

Extreme volatility continues. Owing to the continued exponential spread of the coronavirus and resultant anxiety, the worst stock market decline since the 1987 crash occurred yesterday. Today is seeing a significant rebound (recovering about 1/2 of yesterday’s decline as I type @ 11:45 am Vancouver time). In light of this extreme volatility, I wanted to make some point form comments in this special mid-week update:

- First an announcement: in what should hopefully be a surprise to no one, Brenda and I are now working remotely from home. I suspect we will be here for quite some time.

- As a result of a series of prior moves, I reiterate once again that clients are well underweight equities. Much, though certainly not all, of the market pain has been avoided.

- Economists are dithering in their assessment of the economic impact of the coronavirus. Some are saying recession will happen; some say it will be avoided; some say it will be “technical only”; some say it’s too soon to tell. NICK SAYS: a recession is coming. That said, I acknowledge that it may be brief, and that owing to truly MASSIVE quantities of monetary stimulus (announced) and fiscal stimulus (actively being debated as we speak) that the recovery on the backside of this pandemic crisis might be shocking in its strength.

- To highlight the slow take of economists and the fact that their economic models can’t accommodate the implications of this rapidly evolving health crisis, the Empire Manufacturing Index (essentially New York state, and a regional input into the monthly ISM Manufacturing Index that I never fail to mention when released on a monthly basis) came in at -21.5 from the prior month’s reading of +13.9. This one month decline of 35.4 points represents the single greatest drop in one month since the financial crisis. Economists’ expectations? A reading of + 4.8! Frankly, the actual decline vs expectations is shocking.

- The preceding point is why I said in my regular weekly update of March 6th that I am paying more attention to the opinions and expectations of scientists (virologists, epidemiologists etc.) right now than to economists. Virologists and epidemiologists have spent their entire career attempting to model how a pandemic such as this will unfold. Economists are trying to quickly adjust theirs.

- As I noted in the first bullet point, I think Brenda and I may be working from home for quite some time. As I wrote in last Friday's update, I further think my kids will remain off school until the next school year. These are not yet widespread opinions. In other words, I think the magnitude and duration of the change in our collective way of life will be more severe than consensus belief. If I am right (and I sincerely hope I am wrong), then I think then the economic impact will be very material indeed, and this will lead to further declines in share prices as the realization takes hold.

- I say with certainty that I will not catch the bottom of this market downturn. may be too soon or too late. In fact, I hope to be both, because I intend to use cash on hand to begin buying back equity (i.e. stock) positions in stages. Probably somewhere between 1/5th and 1/3rd of cash on hand at a time. But will do my best to identify overly beaten down quality companies. may also “block in” equity exposure via index or sector ETFs (Exchange Traded Funds).

- To the prior point, I have a list of names on hand. Names include those previously sold at higher prices (i.e. Starbucks, Disney etc.) as well as new names such as Hydro One, Air Canada and Boeing [on these last two, I’d have to be comfortable that governmental support was indeed available and that the prospect of massive dilution of shareholders (as with the U.S. banks in 2008) was off the table].

That’s it for now. All the best and stay safe,


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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