This is what we've been preparing for!

Over the last year or so I’ve been very vocal and active in preparing everybody for a market downturn. Our team of professionals has spent many hours researching and analyzing the markets, trends and numbers, and are fairly confident in our assessment. At the beginning of the year, I also wrote an article (Click Here) stating what our expectations were for 2018, and many of these things have come to fruition.

Dating back to fall of 2016, I had started to express concerns of many of the things that were going in the markets, mainly the Canadian Real Estate market. I felt housing prices were going up way too much, way too fast, and there wasn’t any REAL logic into it – it was mostly a combination of greed and fear (many people were afraid that they needed to buy now, before prices kept going up more and more, many believing that prices would just continue to go up for years and years to come).

My concerns spilled over into the broader overall markets in 2017, when we were seeing markets (mainly in the US) continuing to go up, and hitting all time highs, but without any real rhyme or reason. We knew that much of the growth in the market was what we called ‘artificial’ or ‘fake’ growth. This was because a lot of growth since 2008 was due to a) governments essentially dumping money into the markets to make it look like there was demand, therefore making stock prices go higher, and b) many major corporations borrowing money from the central banks (at close to 0% interest) and buying back their own stock – again, making it look like demand was high and inflating the stock prices.

Also, much of the growth over the last few years, specifically in the US market, was due to the FAANG stocks - also known as Facebook, Apple, Amazon, Netflix & Google. The tech stocks had a great run and accounted for a lot of the growth in the US stock market. That, however, seems to have come to an end, as all are down over 20% since summer. 

Coming full circle, we felt that the ‘bull market’ over the last few years was over-extending and wasn’t logical, and felt that at some point the markets have to come down due to basic fundamentals.

Now here we are at the end of 2018, and unless you’ve been hiding under a rock, we have all seen what’s been going on in the markets. The last few months have been very volatile to say the least, and we anticipate this volatility to continue and the markets to keep sliding into 2019.

This is what we’ve been preparing for!

Over the last year and a bit, we’ve been gradually moving our client accounts into strategies that are more for ‘downside’ protection, which are tactical money management portfolios that strive to minimize losses in down markets. These strategies provide the Portfolio Managers flexibility on moving in and out of the markets when they see fit, take advantage of buying opportunities when they see them, move to more of a ‘defensive’ or conservative construct if needed, as well as move into different geographies/industries/currencies etc… These strategies have been proven to work and they seem to be effective up to now as well.

From the market highs of this year, up until now, the Canadian and US markets have lost about 10% (in a span of only a few months). In our perspective, this is just the beginning stages of a major downturn. Our strategy was to be ‘pre-emptive’ and jump the gun early, before the downturn started to happen. Although we sacrificed a few percentage points on the upside, the logic was that we were preparing for the downturn, and not be exposed to the major drop on the downswing. For example, let’s say you sacrificed 5-7% on the upside, but saved yourself from an additional 20-30% loss on the downside, wouldn’t that be a good trade-off?

Most of our client portfolios started gradually reducing their US exposure starting a little over a year ago, and it seems to have been a good move. The Tactical nature of the portfolios allows the Portfolio Managers the ability to do this, to reduce the risk and protect gains.

Where do we see the markets going from here?

This is a very broad question, and we’ve been asked this many times before. Let’s take a look!

If you look at the returns of the other major markets around the world YTD (year to date), most of them are close to -10% or even worse -- for example (as of Friday's close), China is about -21.5% YTD, Canada approximately -10%, Germany -16%, UK -12%, Australia -8%, Japan -6%, South Korea -16% etc... 

The last few years, the US market has had much higher returns than the rest of the world markets – in some cases 2x or 3x the returns. But we all knew that wasn't sustainable, as the majority of the growth was 'fake growth' or 'artificial growth', as mentioned above.

Considering that most major markets have seen moderate or negative returns over the last couple of years, my thought is that a lot of the 'negative' returns have already been factored into our clients’ portfolios. In our opinion, in the next recession (which, we feel started a couple of months ago), we will see US market take the biggest hit. We feel that since they drastically outperformed everybody else over the last few years, they're the ones who have the most to lose on the downside. IF that were the case, the rest of the world markets would still get affected and experience losses, but we don't feel it will be as steep as what the US will experience. Canada, however, does have an additional risk not seen in most other countries, because if the real estate market crashes, that will have significant negative consequences for the overall Canadian market as well.

If the above mentioned scenario does happen, then we are confident our clients' portfolios won't suffer drastic losses in this next recession, compared to traditional Mutual Fund or Segregated Fund portfolios, as much of the losses are already priced into the portfolio. In other words, if for example China is already down 21.5% YTD, how much lower could they actually go, even if the US takes a massive hit? We don't know for sure, but we wouldn't imagine it would be that drastic (compared to the US losses). 

What should you do?

If you’re already invested into one of our tactically managed portfolios, then we feel that you are well-positioned for this next recession. The tactical management/strategies that we've been talking a lot about and promoting to our clients is basically doing what they are supposed to be doing. 

If you are not, then you should definitely get in touch with me. Doing a proper analysis of your current portfolio and how much exposure you have to down markets is critical in assessing whether you are in the right portfolio for yourself or not. You don’t want to be in a situation where another 2008 happens and your entire last 10 years’ growth is wiped out, and you’re back at square one.

Where the market goes from here, nobody can really predict perfectly. But, one thing we can do is prepare ourselves for what is to come, whether it be positive or negative. Traditional Mutual Fund and Segregated Funds generally only benefit in rising markets, but take a hit in down markets. This means they only have an ‘offensive’ strategy. Our Tactically Managed Portfolios allow our clients to not only take advantage of growth in up markets, but also then reduce exposure in down markets, giving them both an ‘offensive’ AND ‘defensive’ strategy. This takes a lot of the worry and guessing game out of investing, and allows you to have the peace of mind you need in regards to your investment portfolio.

Get in touch with me to do a portfolio review and see how we can provide solutions to limit losses in this next recession, so you don’t see your entire last decade’s gains wiped out!