It's Not Time to Buy

Mar 20, 2020 | Nick Scholte


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The Covid-19 pandemic will get worse before it gets better. Economists continue to be playing catch-up with a crisis developing much faster than their models can handle. Again, I choose to listen to the scientists at this time.

To my clients:

As all will know, it was another terribly down week for North American stock markets with the Canadian TSX falling 13.6%; the U.S. Dow Jones Index falling 17.3%; and the U.S. S&P 500 falling 15.0%.

For the sake of clarity, this week’s update will be short and in point form:

- Covid-19 repercussions are coming fast and furious. California, New York and London have instituted full lock downs in the past 24 hours, and most countries have closed their borders. It is my belief that all countries should institute a mandatory and immediate NATIONAL 30-day lockdown except for essential services.

- If/when lockdown occurs, the economic impact will obviously be severe. But a 30-day lockdown would give global society the opportunity for the quickest recovery. Delayed and partial measures are only going to prolong the worst part of the downturn.

- Sadly, my research (via postings at highly credible sites like MIT, the CDC and others) indicates that a full return to normal on the backside of any 30-day lockdown will not occur immediately. Without going into too much detail, two scenarios seem likely:

- SCENARIO 1: 30 day lockdown eradicates the vast majority, but not all, cases of the virus. Virus will linger owing to imperfect quarantine measures taken by individuals as well as continued spread amongst the millions of essential service employees and members of the quarantined population that will still need to leave their home for essentials like groceries and prescriptions. THEREAFTER, to control the assured pockets that will continually arise, rolling social distancing measures such as currently in place will need to remain in place until a vaccine or treatment is developed. While governments are sure to expedite vaccine and treatment development as much as possible, the estimated time frame for such an outcome is approximately 18 months. I do not think markets or economists have grasped the possibility of a prolonged recovery such as this.

- SCENARIO 2: less likely than Scenario 1, but probably the better of the two scenarios. This scenario posits that coronavirus is vastly more widespread than even the most aggressive current estimates. This scenario sees most people so mildly infected that they never even have a clue they were sick in the first place. If this is what is occurring, then the good news is that the lethality of Covid-19 is far less than the 2 to 4% estimates widely suggested. The even better news is that a “herd immunity” is rapidly developing across the population, and it will make the necessity for rolling social distancing measures less likely and less severe after a 30-day quarantine.

- I again advise that clients are very underweight equities relative to their Investment Policy Statements. That said, in times of crisis, sometimes even perceived safe havens (like the fixed income investments held) can suffer. Thankfully, the cash raised from equity (stock) reductions since I first began taking defensive measures in response to Covid-19 about 1 month ago I have kept as cash.

- To again illustrate how fast economists are trying to play “catch up” to this crisis, The Philadelphia regional manufacturing Index was reported this week and the miss relative to economists’ expectations was as severe as the miss with the New York Region last week.

- On the same topic, economists expected weekly jobless claims to come in at 220,000 this week (keep in mind that claims report the numbers from the prior week). Um, what world are they living in? Of course it was going to be higher. In fact, the claims came in at 281,000. Next week the spike in this metric is sure to be of such historic magnitude that it would have been inconceivable in any other context. I won’t put forth any number I’ve heard or would guess, but it will be historic for sure.

- I will be cautious in redeploying cash into perceived buying opportunities. As I said, I do not think the full magnitude of this economic downturn has been fully grasped. I think further declines are in store.

- With respect to existing stocks, individual equities are in high quality defensive-type companies. Where funds are held, high quality managers have been employed. Nearly all ETFs (Exchange Traded Funds) have been sold.

That’s it for this week. Please stay safe and respect the distancing measures requested and any lockdowns that may be forthcoming.

Nick

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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