Did 2019 Spark Joy in your Life?
It’s hard to believe that 2020 is upon us. It’s already been a full year since Netflix released “Tidying Up with Marie Kondo”, spurning the great junk purge of 2019.
We love year in reviews. We get to highlight everything – from doomsday market predictions made by the media to more positive success stories over the year. We also see this as a great reminder for clients to always stay the course, stick to your asset allocations and to not let emotion get the better of you.
Our 2019 review will focus on three major topics:
US Markets: Rolling Crises
Canadian Markets: Mixed Mandates
Global Markets: Opportunity in Chaos
US Markets: Rolling Crises
If you’ve been paying attention to any news over the past 12 months, it would appear (by the headlines at least) that the ship is sinking and sinking quick. Between continued trade wars, juvenile tweet-storms, one of only three presidential impeachments in 242 years and soaring economic anxiety among the working classes, the USA always seem to be on the cusp of another 2008-style investment market blow up. Time and again though, despite the fever pitch of the media machine, this doomsday hasn’t materialized – helping reinforce our often repeated recommendation to stay focused on your long term goals.
Tyler Mordy, president and CIO of Forstrong Global Asset Management, uses the term ‘rolling crises’ to refer to the theme over the last decade of regular political panic attacks followed by 11th hour rescues. Responsible for many a client (and advisor) stress ulcer, this cycle of ‘panic, then prosper’ over the longest secular US bull market in history has created incredible wealth at the expense of substantial anxiety as we’ve watched swings of 15-20% downwards followed by whip-saw recoveries right back to parity in months, not years. Sure, it’s been profitable to participate in the US markets, but the emotional cost of such volatility is something many investors are starting to prioritize (particularly those in a less risk tolerant income planning stage).
Long story short, US markets are continuing to experience a ‘softening’ as the economic cycle continues to extend out beyond any reasonable lifespan. Softening here refers to the continued theme of continued but significantly slowing growth. Like many advisors, we are not suggesting a panicked sell-off of US exposures, but a careful examination of which exposures you own is the name of the game as 2020 begins. Do you need to own extremely volatile sector or micro-cap investments in the hopes you achieve high double digit returns, or would it be more prudent for your goals to invest in a more predictable fund focused on stable and predictable dividend paying companies? These are the questions we’ve been focusing on for the last couple years and continue to expand on moving forward.
Canadian Markets: Mixed Mandates
After a brief but intense election campaign, Canadians voted to temper the Liberal majority that had been in power since 2016. With Western provinces (particularly the prairies) overwhelmingly voting for the Conservatives, a clear message was sent that voters outside of Ontario and Quebec are feeling alienated by Liberal policies and that a stronger voice was needed to improve the outlook for (among other things) the Canadian energy industry.
Economically, Canada ended out the year 2019 with a bit of a roller-coaster ride of both positive and negative indicators. Certain statistics such as the total number of jobs (up 293,000 jobs since November 2018) seem to trend positive, however the unemployment rate which has been hitting lows over the last 5 years bumped up a bit at the end of the year from 5.5% to 5.9%. Wage growth has likewise risen (4.3% to 4.5%), but in the face of certain sectors such as energy experiencing higher-than-average job and wage losses. Similarly, Canadian Equities surged hard in November after the Saudi oil attacks, causing the TSX to rise to a new all-time high. Short term volatility being what it is, things soon fell back to normal ranges, but the good news is that strong dividend payers are continuing to post healthy earnings and continuing to distribute those earnings to shareholders as dividends.
Governments at all levels are faced with challenging fiscal and monetary environments after 2019 and moving into 2020. Insolvencies are on the rise (although bankruptcies, the step of legally declaring debts unpayable, continue to remain low), which is a concerning statistic as it shows that the heavily leveraged Canadian household is starting to feel the pinch of debt. The Bank of Canada continues to hold onto rate increases which it will need to do eventually to prepare us for any future recessions. Currently, the signals coming from fiscal and monetary policymakers seem to be that they are waiting for some areas of the Canadian economy to recover further before raising rates to a more sustainable long-term level.
Global Markets: Opportunity in Chaos
2019 posed a very challenging year for Global equity managers – it seems like everywhere you looked, a new ‘big bad thing’ was occurring. Between the unrest in Hong Kong, Europe, ongoing trade wars, failures of long-standing economic and military treaties… again, it felt very ‘gloom and doom’. But, as seems to be a theme, the reality of the investment world is that there was still opportunity to make healthy returns provided careful due diligence was performed.
There have been many emerging themes in global markets over the past 12 months. One such theme, echoed by Global Macro director Jurrien Timmer at Fidelity during his December 16th, 2019 “Before the Bell” market call, was how rotations have begun to materialize out of large-cap stocks and into more opportunistic small-to-mid cap stocks – reinforcing the strength of a growth approach when one goes global. Typically, this sort of behavior is an early cycle behavior and bodes well for global managers trying to identify companies poised for growth. Likewise, earnings growth which has trended downwards in the last few years has begun to reverse that trend – a very positive sign for managers focusing outside of Canada and the US.
This doesn’t mean we’re not faced with challenges, as again instability seems to dominate the news feeds, but it does highlight how economies are still growing and there is always an opportunity for a manager willing to dive deep and actually do their due diligence on companies that might not be on our day-to-day radar.
On a December 2nd, 2019 BNN appearance(1), one of our favorite global managers, David Fingold with Dynamic Funds, gave a few interest perspectives on how he and his team have seen success over the years in the highly complex global investment world:
Don’t take risks you don’t understand – If you are told to buy or sell
something but you don’t fully understand the risks involved, don’t act.
Don’t invest outside your circle of competence – Knowing what you know is
critical when evaluating a complex topic like global equities.
Don’t follow the herd – Just because everyone is doing it doesn’t mean that
you should also be doing it, particularly if rules 1 and 2 apply.
Have discipline – Know your goals when you invest; if you said you’re investing for 3-5 years, don’t buy investments that are more suitable for someone who has 10-12 years to ride out volatility.
