A word on staying the course

Last week we wrote on the dynamics of market recoveries, and discussed the concept that markets tend to make up nearly half of their losses in a matter of weeks, not months during periods of significant drawdowns.

 

This week we wanted to continue to build on the idea of why “staying the course” and having a disciplined financial process is important. The following exercise is courtesy of one of our mutual fund providers.

 

Consider an investor that gets nervous and says “I think I will go to cash for a while and see what happens”. The below table illustrates the largest 10 up days in the TSX since 2000, incidentally two of the 10 happened in the last three weeks. The graph on the right illustrates how the returns of the TSX over a 20 year + time frame vary under different scenarios of not being fully invested.

 

This exercise shows that missing even a few of the best days can have a detrimental impact on long-term performance. The reason this is the case is due to the fact that the compounding of our investments over long time periods is a much more significant driver of our wealth creation than are the individual timing decisions that we make.

 

 

As no one can predict the future, it is important to have a reasonably diversified portfolio of good quality assets, and resist the urge to abandon your plan in time of stress or times of uncheck optimism for that matter.

 

Let’s look at one more chart that tells the same story in a slightly different manner.

 

The below chart came from RBC Global Asset Management and it looks at the odds of a balanced portfolio generating a positive or negative return over various time frames. The key takeaway here is that as one’s investment horizon increases so does the likelihood of positive returns, substantially so. While the daily volatility that we are experiencing in markets today unprecedented, history gives us some comfort that we can get through this, as long as we are invested in a well-diversified portfolio and we stick to our long-term investment plans.

 

 

Thoughts on the current state

Economic data is beginning to role in and is now reflecting the pressures COVID-19 is putting on the global economy. We believe that the poor economic data is largely reflected in the equity markets deep sell-off. As evidence – we found it encouraging that equity markets largely shrugged off yesterday’s U.S. jobless claims report which illustrated an additional 6 million workers have filed for unemployment benefits in the past week.

 

In the coming weeks we will move into U.S. corporate earnings season and we expect increased volatility in the equity markets around those results. We will unpack the dynamics of the earnings outlook in greater detail in the coming weeks.

 

A critical question from here is just how deep and long will the economic downturn be? We remain of the view that COVID-19 will not cause permanent damage to the economy or the earnings of most businesses long-term. At the same time we consider the possibility that a worse economic outcome could arise if the virus becomes more acute than current health care models are forecasting.

 

As in any crisis, there is always going to be an element of “yeah but it’s different this time”, and there is no denying it certainly is different now. But the differences cut both ways. It is true that we have never seen a time in recent history where global commerce has been affected to this extent. With that said, we have also never seen a time where global central banks and governments have responded with the speed and magnitude of stimulus that we have seen to-date. As we have said before, to us this signals that policy makers have adopted a “do whatever it takes attitude”. Contrast the recent moves by the Federal Reserve and the Treasury in response to COVID-19 to the actions taken during the financial crisis - it literally took months for policy makers to respond Bear Stearns had already fallen before the bailout package was approved.

 

Some positive progress on oil?

Oil surged over 30% higher this week on the potential of a supply-cut deal. President Trump reached out to Saudi Arabia and Russia, and suggested that a cut to production is potentially on the table. RBC Capital Markets commodity strategist believes that the Saudis could be prepared to drop production by ~8.5 million barrels per day, but only If Russia joins the agreement and the U.S. offers to scale back output as well. Alberta’s Premier said that the province was also open to joining a deal. OPEC members are scheduled to gather virtually on Monday.