As Has Been the Case For Some Time Now, We are Underweight Equities and Defensively Positioned; Opportunity Will Come, But a Retest of Recent Lows and Possible Newer Lows is Our Base Case

Mar 27, 2020 | Nick Scholte


Even if the U.S. is "opened back up" by Easter (not likely in our opinion), the changes in consumer behavior will be lasting and profound. These will suppress the vigor of the recovery. That said, monetary and fiscal stimulus measures are massive.

To my clients:

An announcement first: as all will know, Brenda and I are working from home. Our office phones have been forwarded to our cell phones. It’s come to our attention that if a client calls while we are using our cell-phone line for whatever reason, owing to the call forwarding features the call may be dropped by the phone carrier and/or go to a voicemail system at the office that won’t be top of mind. During these times of adjustment, if you call Brenda or I and don’t get through correctly, or you leave a message and don’t receive a reply, I promise we are not intentionally ignoring you. Please try your call again. Better yet, send us an email and ask us to call you. We are constantly replying and checking emails throughout the day. In fact, email would be my preferred first course of communication at the present time.

It was an up week for North American stock markets with the Canadian TSX finishing up 7.1%; the U.S. Dow Jones finishing up 12.8%; and the U.S. S&P 500 finishing up 10.3%.

As evidenced by the weekly market returns above, volatility (both up and down) continues to dominate the markets. Overall however, I think the general 6 week down trend will continue to prevail. Owing to a rapidly changing economic and news flow environment, as well as the volume of matters I’d like to address, I’ll again be presenting this week’s update in point form. I expect this will be a regular feature of my updates in the weeks and months ahead:

- The U.S. Federal Reserve signaled it would do whatever it takes to maintain monetary stability. To these ends, it pledged a near unlimited quantitative easing program (i.e. purchases of bonds) that notably will also include corporate debt for the first time.

- Today the Bank of Canada (BOC) announced its 3rd 0.50% rate cut in as many weeks bringing the short term lending rate to 0.25% from the 1.75% level at which it sat at the beginning of March. This level marks the BOC’s “effective lower bound” for rates.

The U.S. Congress approved a $2 trillion fiscal spending package that includes measures predominantly focused on supporting individual workers and small companies with less than 500 employees. Canada has pledged over $50 billion in fiscal supports. Both countries will likely be adding significantly to these pledges as the pandemic fueled recession continues.

- In keeping with the monetary and fiscal largesse of central banks and governments worldwide, the European Central Bank (ECB) effectively broke its own self-imposed rules (per “The Economist”) and dropped various limits to its own QE program.

- The above actions are just some of the more notable measures being taken worldwide. These measures are not being taken without reason. There has been an abrupt and near full stop to the “in person” economy. Recession is a certainty (I’m still amazed by the number of pundits suggesting “if” recession happens or we “may” see recession). The only question will be how deep and how long the recession will be.

- To my comments in the immediate bullet point above, former ECB President Mario Draghi said “a deep recession is inevitable”. He was speaking to the European situation specifically, although may also have been referencing prospects for global recession. Regardless, the North American situation is tracking one to two weeks behind the European experience. Economists who continue to hold out that recession “may” occur or think it’s an “if” proposition need just wait one or two more weeks. They will come around soon enough.

- Approximately half of the U.S. population is presently under some form of lockdown. The rest are under strict “social distancing” edicts. As we all know, Canada has similar measures in place (i.e. Ontario is under official lockdown; BC is under “social distancing” edicts).

- The U.S. now has more COVID-19 cases than any other country in the world. It will surpass 100,000 national cases sometime this afternoon… perhaps by the time I press the “send” button on this email. New cases continue to accelerate. News flow over the weekend will not be good.

- That said, the massive fiscal and monetary stimulus cited in the first 4 bullet points above SHOULD lead to a very powerful economic rebound when the rate of U.S., Canadian and Worldwide cases begin to decelerate.

- However, to counter the traditional economic perspective that the economy SHOULD rebound strongly, I’d like to offer a personal anecdote that I typed to a client in an email yesterday. Here are my copy and pasted comments (slightly edited for clarity):

"I don’t believe in the sustainability of this rally. Even if COVID-19 gets sufficiently suppressed to open the U.S. back up by Easter (I don’t believe this either), the fact is that people’s attitudes and interactions have changed. I just picked up my car from having some work done (dropped it off over two weeks ago prior to the social distancing taking hold… pick-up was delayed owing to the need for a special part order); everyone was wearing masks, keeping their distances, and looking at each other sideways. When I got my car I immediately took disinfectant wipes to all interior surfaces and door handles. If there is no vaccine, even if the economy reopens, a significant portion of the population is going to maintain this behaviour for some good while afterward (including, probably to some extent, me). That is not conducive to full economic output. I think this is an under-appreciated aspect of the pandemic. Consumer behaviour will be continue to be suppressed even if no lock downs or social distancing initiatives are in place.”

- In last Friday’s update I wrote the following about weekly jobless claims: “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.” Well, the number was reported yesterday. 3.28 million jobless claims were reported for the week. At 682,000 claims the previous record came in 1982, and was nearly matched at the height of the financial crisis. This week’s claims number was nearly 5 times higher than the previous record. The magnitude of this figure is jarring, and nearly unbelievable when seen in graph format. The graph is the accompanying lead image to this week's update.

- All the doom and gloom aside, I believe in the resiliency of human initiative and in the power of economies to adapt and respond. We WILL get through this. There will be tremendous investment opportunities in the weeks and months ahead.

- Further, I am fully cognizant that I took although I took reasonable defensive measures during the 2008 financial crisis, I was too cautious during the subsequent early stages of the recovery. I wish to do even better this time. This means that I will assuredly miss the bottom in putting the large quantities of client cash back to work. It’s entirely possible I will be too soon in the reinvestment of my first tranche of client cash.

- With respect to client cash and stock positions, I again reiterate that I am VASTLY underweight the long-term client equity (stock) targets set in individual Investment Policy Statements. Equally, we are VASTLY overweight cash. Fixed Income positioning is roughly in line with what it was before this crisis started, and has proven to be a bumpier ride than one would expect from that asset class.

- In the last two weeks, I’ve rotated more equity into more defensive utility positions (Hydro One, Northland Power, TransAlta Renewables). These new utility positions are in addition to the earlier increase to full weight of Fortis. In spite of this rotations into utilities, I slightly reduced equity weightings elsewhere on market strength this week.

- I also doubled client positions in gold bullion from ~1% to 2% earlier today. As previously communicated, I don’t intend to venture too far down the gold bullion path because I don’t understand the economic basis of the asset. But with the monetary largesse of central banks worldwide, it plays nicely to the thesis of those who believe in gold as a monetary alternative.

As one might take from this week’s update I could go on and on. I’ve literally set aside and not written about dozens of other commentary ideas that I accumulated throughout the week. I’ll not bore clients and other readers with the minutiae of what I find economically interesting. Rest assured, I am watching markets and economic developments extremely closely and am acting when and as appropriate on behalf of clients.

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


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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Any recommendations herein are for the exclusive use of clients of RBC Dominion Securities and Investment Advisor Nick Scholte. Any other direct or indirect recipient of this email should consult with his/her own licensed investment advisor prior to implementing any investment action he/she may be contemplating.