Monthly Partner Memo – April 2021

Apr 01, 2021 | Paul Chapman


Spring seems to have come quickly, and with it some hope that vaccines will be administered for you and your family in the coming weeks and months.

Spring seems to have come quickly, and with it some hope that vaccines will be administered for you and your family in the coming weeks and months. If you haven’t seen this yet, you can register on Shoppers website and you’ll get an email/text when you qualify for the vaccine: "Register now and when eligible we will contact you to book your COVID-19 vaccination appointment."


Friends & Partners,

We All Seem to Love Bad News…

The media does a great job scaring us. I have a number of clients, both seasoned and new, who are very fearful of the market outlook. There are certainly risks to the outlook, there always are. If there weren’t, you’re likely buying at the top!

The problem is that we demand bad news, it’s not the media conspiring against us. In 2014, a Russian news site conducted a bold experiment. Instead of posting its usual largely negative news stories, it reported only good news. The result? No one cared. The site lost two-thirds of its normal readership that day. In that business they say “if it bleeds, it leads.” Humans are wired to crave bad news and the media delivers.

The financial media is no different. How many market doomsayers have you seen in the media espousing negative forecasts whose comments often spread like wild fire? They’re endless. One of my close friends who is a chief economist at another institution had a positive outlook at the bottom of the market last March when the world was ending with COVID – we know now that his outlook was correct – but the leading financial networks wouldn’t let him on the air for weeks because he had a positive outlook at the time, and that wasn’t “selling” viewership.

Below is a collection of notable predictions from RBC GAM, along with the market’s response in the time since:

COVID-19 market volatility chart in page

This doesn’t mean markets don’t go down or that there aren’t risks. But we need to consider all the data points when we invest, and prepare and position accordingly to minimize risk using process. That’s what I’m here to help you with.

Rising Yields and Inflation – The Talk of the Town

As most of you know by now, a cornerstone of my message for some time has been to expect yields to rise, bonds to get hurt, inflation expectations to increase, and bond correlations to become positive with stocks (remember, this is bad – we want bonds to move opposite to our stock holdings to offset the noise, a role they’ve traditionally played for many years). These predictions have all come to fruition, and are likely to continue.

Yields rising aren’t necessarily a negative if they’re associated with a positive economic outlook, but equities remain at risk of a sell-off if yields rise at a faster-than-expected pace. What level of Treasury yields will trigger a significant selloff in stocks? Fund managers largely think ~2%.

Expect inflation to also continue to dominate the narrative in concert with yields moving upward, and most of us are feeling it by now. The Fed will clearly let yields and inflation ‘overshoot’ to the upside as they’ve always done, so the risk of a ‘taper tantrum 2.0’ remains significant for later this spring. This could also hit equities as it has done in the past.

But, both Morgan Stanley and CSFB found that rising inflation doesn’t tend to pressure P/E valuation ratios until inflation breaches 3%:


  • The recovery of the economy --> reflationary
  • Sizable deficit spending by US --> weaker USD, higher rates --> inflationary
  • Supply chain disruptions --> higher input costs --> inflationary

Financial markets have not faced these dual factors of rising yields and inflation in 20-30 years, so we can expect markets to over-react and remain very sensitive to rising interest rates.

And Valuations Remain a Concern

Goldman Sachs notes that in absolute terms, most of the US equity market carries above-average valuations relative to history. This is unsurprising with the S&P 500 trading at 22x next-twelve-months P/E (96th percentile). Valuations today are arguably more elevated than they were in 2000 at the height of the dot com bubble. 20 years ago, the aggregate S&P 500 P/E was a similar 24x, but the median stock traded at 14x. Today, the median firm trades at 21x.

But There Are Also Many Positives for the Outlook

In Australia seated dining is not only back to normal, it is double pre-COVID levels:

Many people are wealthier than ever, and have money to burn – wealth is higher than ever, bank deposits are through the roof, and government handouts are likely to be spent:

As well, research estimates across the Street still may be too low, so companies may be performing much better than expected. Currently, 2021 revenues for the S&P 500 are forecasted to grow ~10%. However, economic forecasts imply 14% revenue upside (see chart below). If these predictions are even directionally correct, S&P 500 revenue and earnings estimates are far too low:

So What Are We To Do?

Given that central banks have been pumping the gas for some time and continue to do so, we are in a semi-permanent state of a perpetual boom, punctuated by the occasional sharp crisis where we all have a near-death experience and breathtaking drawdowns. This has implications for the underlying distribution of asset prices and for volatility – there is increasing ‘tail risk’. This means that you very likely have much more risk exposure in your portfolio than you think. It has become nearly impossible for the average investor to manage their risk, and most investors are not equipped to hedge properly.

Leverage in the system is much to blame for this. But it isn’t going away, and you can’t ‘fight’ it - this is the battlefield moving forward. Every event seems like a one-off exogenous event, but they keep happening with more frequency, and we get end-of-the-world reactions like people wanting to shut down the markets. And leverage in the system keeps increasing.


Expect inflation to also continue to dominate the narrative in concert with yields moving upward. On this theme, commodities may continue to have a bright outlook – Goldman Sachs commodity analysts are bullish in part because of what they see as “structural underinvestment” in commodities, particularly in energy, following a decade of poor returns. While the energy-heavy S&P GSCI commodity index has rallied 66% from its April 2020 low, its total return has been negative 60% over the past 10years against a 263% total return for the S&P 500 index.

We’ve noted in prior months that the case for being cyclically-tilted is strengthening, which has been playing out recently and should continue to do so. These points support the continued positive outlook on this front:

Like many finance professionals, I believe that we will eventually have a correction, it’s as certain as death and taxes. It’s a necessary and healthy reality of the stock market. But you can’t time it and real professionals don’t. But we can be prepared with a defensive asset mix and some cash to deploy at the right time.

It’s also important to remember the U.S stock market has always recovered from corrections. All 28 corrections over the past 50 years have been more than completely erased by a subsequent bull market rally.

I noted in last month’s note that timing the market is a mug’s game, and there are still a number of supportive factors to the overall outlook. But we need to be positioned accordingly, risks remain, and bonds aren’t going to play the capital preservation role they’ve traditionally played. Alternative assets with uncorrelated returns to the market are one of the few solutions to utilize moving forward, something I’m lucky to have almost 20 years’ experience in.

So Be Prepared and Positioned in Solid and Active Portfolio

It’s important to realize not every single stock recovers from corrections and bear markets. Active management should continue to outperform passive strategies (i.e. buying a bunch of ETFs to track various indexes will continue to underperform for the foreseeable future I believe). Dispersions within and across asset classes have widened (meaning that strong portfolio managers can outperform by picking winners and avoiding losers).

“This is a time to be focused on stock picking and conviction investing,” says Tony DeSpirito, CIO of U.S. fundamental equities at BlackRock. “This business cycle will be faster and there is a lot of pent-up demand. The dynamics of the cycle will play to the strengths of stock pickers.” In February, 70% of large-cap actively managed funds outperformed their benchmarks, the best performance since 2007 according to Bank of America.

This will all result in continued high volatility and less market efficiency – contributing to a ripe environment for strong and active portfolio management. I partner with the leading global portfolio managers to bring my clients the best-in-class risk-adjusted portfolios developed to grow and preserve your capital – if this sounds of interest to you, let’s have a discussion.