A word about your portfolio..

It may be difficult to focus on the outlook for financial markets when the welfare of our clients, family, and friends is top of mind. Nevertheless, putting events that affect the markets into perspective is an important responsibility of ours – in good times and bad. As a result, we wanted to share our key thoughts on the current situation and how we intend to approach the days, weeks and months to come.  

Volatility

We are currently experiencing some of the sharpest moves – both up and down – in stock prices that we have witnessed in some time. It feels particularly extreme because of where we just came from. It has only been a year or so since we left behind a decade of unusual calm in the markets. The emergence of a pandemic has been the unforeseen catalyst that has driven this bout of heightened volatility. This has been exacerbated by a combination of the velocity of news (particularly via social media), fear and panic, illiquidity in the bond market, and the broad adoption of technology-driven trading.

Coronavirus

The spread of the coronavirus is the key issue. What has become apparent is that the only proven way to slow infection rates is through social isolation and quarantine. It’s been successful in China, South Korea to some extent, and are awaiting results in Italy, which has recently undertaken similar action. Elsewhere, more needs to be done and we expect to see other countries to move in that direction in the days and weeks to come. Ultimately, governments will have to sacrifice their economies to some extent for the sake of society’s welfare.

Energy

Another factor has been the rapid decline in oil prices as a result of a standoff between two of the world’s largest oil producers: Saudi Arabia and Russia. While it’s hard to predict an outcome given its political nature, we expect this could last for a period of months, if not longer. But low oil prices hurt both countries and there is likely some pain threshold, measured in months, at which point negotiations may renew. The implications are important for Canada as any extended period of low oil prices will hurt our economy and our market, both of which depend on the industry. Furthermore, the bond market is watching this closely as investors have justifiably grown concerned about the ability of some companies to repay their loans should prices remain depressed for an extended period.

Governments and central banks

We need to see more from governments around the world. Some action has been taken, but more is needed. In particular, we look for governments in North America and elsewhere to focus on measures to more meaningfully contain the virus and slow its spread, largely via social isolation and mandated closure of events and even businesses. Along with this, we need to see governments help businesses and consumers through this period where they may face lost revenue and cash flow. These were similar tactics used in China and more recently in Italy. Meanwhile, central banks have already lowered rates and, more importantly, taken action to ensure that businesses have proper access to credit should they need to borrow money.

Implications

The implications for economic growth over the next few months are negative. But the degree of the fall in stock and corporate bond markets in recent weeks suggests markets were likely reflecting an already-heightened probability of economic recession. The important question now is whether the coming measures taken by governments and central banks are meaningful enough to convince investors that the impact will be a matter of a few months and a mild recession versus something that extends well into the second half of the year and is deeper in nature.

In the near term, we expect these large swings in prices to continue. In our experience, basing investment decisions on extreme scenarios and trying to make large portfolio shifts in today’s environment of big price swings is very challenging. It may be too short-term focused and may do more harm than good given the possibility of government intervention. Past experience reminds us that market declines often end in a climactic fashion. But no one has the ability to accurately predict exactly when that will be.

Rather, we are committed to remain disciplined in our investment approach. This means: focusing on your long-term objectives and ensuring your portfolio is properly structured to deliver your required long-term outcomes. To accomplish this, a few measures we may undertake in the future include:

• Rebalancing of positions across your portfolio
• Harvesting tax losses where appropriate
• Undertaking due diligence and reviewing all holdings to ensure quality
• Opportunistically adding to existing or new positions that meet our criteria should the prices become excessively cheap

Should you have any questions or concerns, please feel free to reach out.