Our current market thoughts

22 novembre 2018 | Richard I. Schaefer


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To use a sports analogy, just as a really good goalie in hockey can make a coach look extremely good, or how an excellent quarterback in football can make the head coach look very smart too, in the investment industry a bull market may make us look smart, while conversely, a bear market (or “correction” in a bull market) may give you cause to wonder.

Occasionally I hear from clients when looking over their investment portfolios, that they have “lost” X number of dollars over the past while. What I find interesting is that if your home had recently fallen in value by say 5 – 10%, which is not unreasonable (especially in the Toronto area), would you look at that drop in value and say that you have “lost” X numbers of dollars? Probably not, and yet with investment portfolios, where the values can be seen daily, it is frequently looked upon as a loss. That shouldn’t be the case, in my opinion. With well-diversified portfolios, the day-to-day valuations shouldn’t be looked at so closely.

For most of this year the global and Canadian stock markets have been negative. The US market, on the other hand, benefiting from lower taxes and reduced impediments to business, has been, comparatively speaking, the best equity market in the world. However, over the six weeks or so, the US markets too have now gone into negative territory.

It almost always happens that what has taken many months to appreciate can fall down in a much shorter time period. When you think about that, it makes sense. It is a far easier decision to sell what you own, as there are multiple reasons why you may either need to or want to sell. But to buy? That requires much more thought, conviction and courage.

Why have the overall markets been down since the beginning of October? There can be any number of reasons or opinions, some real and some less insightful. There are always “issues” around the world, which on a day-to-day basis, can affect the sentiment. However, it is important to remember what always brings the market back on the proper track? Corporate earnings, and the forward projection for corporate earnings.

Here are some other thoughts to consider:

  • The trade wars and tariff wars that we read about are of course real, but only up to a point, as I think this current sell-off has more than reflected the uncertainty caused by it.
  • We recently hosted a seminar featuring our firm’s chief strategist, Jim Allworth. He believes that this is a “correction”, a nasty one at that, in an otherwise bull market.
  • Our top technical strategist analyst in the States, Bob Dickey, had the following comments today: “Keeping in mind that trends tend to gain momentum into a top or bottom, with the biggest day often at the end of the move, makes it more likely that the recent pullbacks in the big Tech names could still be looking forward to some climactic finishes to their corrections. We believe that trying to pick the bottoms or buy points is not possible until after some longer periods of testing and basing are behind them, which takes time to evolve. Eventually, but fairly soon, we suspect that the current pullback will bottom once again to set the markets up for a year-end rally but still remaining within the overall range of the past year”. He, too, sees this “correction” as occurring in the midst of a long-term bull market.
  • One of the best portfolio managers in Canada, Mark Schmehl of Fidelity, is very bullish, and says “that in bad markets, you have to ride it out”. He said that when the markets go down, as they have of late, everything goes down, even his stock holdings, but when the markets turn back up, he almost always outperforms his peers.
  • The world-renowned newsletter, The Gartman Letter, highlights what is called the “Fear & Greed Index”. Right now their barometer shows “Extreme Fear”! It always shows such an indicator at or near market bottoms. In Dennis Gartman’s words today, “the CNN Fear & Greed Index has fallen to the lowest level to which this index has fallen since the spring of this year…The market is egregiously, preposterously, violently and almost unprecedentedly over-extended to the downside…”. Historically we see the most fear at bottoms and the most euphoria at market tops. We are certainly within a period of enormous fear, so hopefully we turn around soon.
  • What is most likely to be the catalyst for the markets to head higher, and quickly? Some kind of agreement between the US and China regarding tariffs.

We made a conscious effort over the first half of this year to reduce our exposure to bonds and balanced funds, because rising interest rates were hurting the performance of this so-called safer investment vehicle. Balanced funds have bonds in the asset mix.

We also have been primarily invested in the US market, with our Canadian exposure being almost entirely to our banks and a handful of real estate trusts.

What are we doing now? We are staying the course as we believe that we are invested in the right areas. Most of our activity of late has been tax-related strategies prior to year-end.

We understand that the volatility is unpleasant to experience. Should you wish to talk about your investment portfolios please don’t hesitate to contact us. Your thoughts and feedback are important to us. In the meantime, be well. Thank you.

Richard I. Schaefer

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