A look back. And forward.

Global equity markets experienced some weakness this week, though the decline was sparked by no obvious catalyst. The week was also highlighted by a combination of hope on the vaccine front and global economic data for the month of August that suggest the recovery is continuing, albeit at a pace that has moderated.

The selloff that occurred was notable because it was accompanied by a meaningful jump in volatility, though levels remain well below the extremes seen earlier this year. Furthermore, the selloff was led in particular by the so-called “growth” stocks that have been responsible for leading the global markets higher in recent months. But the ingredients for this week’s decline may have started to come together weeks ago as there was growing evidence that fewer stocks were making new highs despite the market itself moving higher. This is often regarded as a lack of “breadth,” which can sometimes foreshadow future weakness.

I think it’s always good to keep oneself honest by looking back at what they said earlier, and I was reading through the emails I’d been sending since February. Thankfully, I didn’t have too many things I said that didn’t age well. And as the market looks a little like it’s getting ready for higher volatility (More ups-and-downs, not necessarily a sustained drop), this table I sent out in mid-April is probably a timely reminder.

Since I sent that in April, the TSX has risen 13% and the S&P500 has risen 21%, both about average for each index’s 1-year return off of a drawdown. So sell everything and wait for the inevitable weakness, right? Probably not. Here’s what I wrote on March 10^th. The TSX has just fallen 9% in one day and the markets had been halted; the claxon “sell sell sell” had started to ring, loudly, and we had no idea then how bad the COVID-19 story was going to get (you’re right, this does seem like two lifetimes ago):

“

Being all-in or all-out are always terrible strategies. I like to say that investing should be like turning a dial, not flipping a switch. My father used to say that it was about leaning into- and leaning out of- investments. Here is a chart of the magnitude of the one-day moves (+ve or –ve) since 1990 on the TSX with the highest and lowest 25 days highlighted:

Notice how close the top- and bottom- 25 are to each other in each period of time. If you tried to time the market and miss the bottom 25 days, you would almost certainly miss the top 25 days as well. When the market turned around in March of 2009, there was nothing particularly special in the news. In fact, most of the news was still negative. There was no technical indicator that started finally flashing green. There was no siren. The market just…stopped going down and started going up.

”

Thankfully, the market did just…stop going down, and started going up. But it wasn’t symmetric. I said earlier that the S&P500 was up 21% since mid-April, but here’s what actually happened: the top five companies by market cap in the S&P500 (Apple, Amazon, Microsoft, Google, and Facebook) were up on average 39%, and the other 495 companies were up only 16%. Keep in mind, as well, I’m talking about the recovery off of an historic low and those top five were also some of the least affected by the market tumult in the first place.

So what does this tell us about where we are going for now? It doesn’t tell us much. We’re in a different time than we were when I wrote those. We’re looking instead towards recovery, which will mean both successes and tragedies for companies and the individuals who drive our economy. We’re also looking at a US election, one that is sure to be both disruptive and transformative. The idea that the outcome of the election will determine the course of the US for decades is likely not hyperbole, and it will be important to inoculate portfolios against the risks to each result.

Add on to this the changing face of the global economy and trade picture that is surely going to face us on the other side of COVID, and there isn’t really a script for what is to come. Vigilance will be paramount, as will risk avoidance. Reading my comments above, one might think I was counselling for stasis in portfolios (e.g., whatever you have, don’t do anything). But in truth what I was recommending was confidently navigating along a winding path, with numerous course corrections along the way. In our most followed equity portfolio, for example, we changed asset allocations several times, rebalanced positions frequently to take profits and losses, and turned over more than half of the positions we held in the portfolio. Holding firm doesn’t mean putting one’s head in the sand, it means putting one’s head on a swivel.

On the economic front, there was much to digest this week. The global services sector, which includes businesses in areas like hospitality and leisure for example, was hit particularly hard this year given the nature of the health crisis. But, data for the month of August across Europe, Asia, and North America suggested that this part of the global economy is continuing to recover. However, the pace has moderated. This slowing may be a function of a normal levelling off following a strong initial rebound in recent months, or it could be a result of something more worrying such as renewed concern on the part of consumers or localized lockdowns in certain areas that have faced a resurgence of the virus.

Separately, employment figures across North America suggest a similar trend of ongoing recovery but moderating momentum. Canada and the U.S. both saw another month of employment gains in August. Inevitably, some investors will focus on the fact that nearly half of the jobs lost across North America during the peak of the pandemic have now been recouped (to be precise, more than half of the jobs lost have been regained in Canada). Others are likely to emphasize the fact that millions of people still remain unemployed and are depending heavily on government programs. I think it’s important to recognize that meaningful challenges remain, but to also understand that we are in a period of healing and recovery that will take time.

I have a few links below, as well as some information on RESPs, and an invitation to an event put on by our High Net Worth Planning Services team.

Enjoy your long weekend, and make the most of the closing out of summer!

Sam

---

Back to school - RESPs

It’s almost time to send kids back to school, be it pre-school, grade school, or university. For the parents and grandparents out there, I have included links to two articles on Registered Education Savings Plans (RESPs). These excellent savings vehicles allow for tax-deferred growth of savings for post-secondary, as well as access to attractive Canada Education Savings Grants (CESGs) and possibly Canada Learning Bonds (moderate income families), and a number of additional provincial incentives (BC, Saskatchewan, and Quebec). When withdrawn, the taxable portion is taxed in the students’ hands, not their parents’, usually to good tax advantage.

· Establishing an RESP

· Withdrawing from an RESP

---

Marginalia from around the web