Getting Back on Track:
As leaves turn color, the weather gets colder and children settle back into their ‘new normal’, we too are getting back to our regular monthly updates.
Markets have been turbulent but recovering since the short-lived crash in February and March. There are a lot of reasons and rationalizations that try to explain market behavior this year – we’ve spent many hours listening to and discussing with portfolio managers to ensure clients assets are not only recovering but are as shielded as possible from future ups and downs.
“Recovery” and a Path Forward:
Since markets bottomed out on March 23rd & 24th*, we’ve seen a remarkable ‘bounce’ back from those deep dives. While the Canadian market is still hurting from the depressed Energy sector, American equities have recovered nearly to their February highs on the back of unbelievable fiscal stimulus injected into their economy by the Fed. That being said, most well diversified investors have recovered much, if not all, of their losses YTD and are buckling up for the next round of volatility.
With over $3 trillion of new assets on the balance sheet of the Federal Reserve in the US**, inflation near-zero and markets shockingly dislocated, all on the eve of the most contentious presidential election in recent history, all of our efforts are on trying to make sure we have a comfortable grip on what comes next.
Our focus this month is to give some insight into themes that our trusted Portfolio Managers and Economists have been working on as they look ahead at the next 6-12 months.
*: S&P 500 TR and S&P TSX Composite TR indexes
**: US Federal Reserve
What Managers and Economists are saying:
Perhaps the most common two questions we’ve seen circulating in the last month or two are:
1. Tech valuations are really high – are we on the precipice of another ‘Tech Wreck’ like markets saw in the late 90’s and early 2000’s?
and
2. What is the presidential election going to do to markets?
We’ll provide some commentary on these two themes today.
Is a Tech Bubble going to Burst?
For the first question, the answer has been a pretty resounding no. The fear has been driven by the huge burst of growth in the Tech sector that has driven much of the US recovery so far this year. This along with healthcare and consumer discretionary spending (think entertainment, fast food and sportswear) have been responsible for much of the market recovery over the last 6 months. In fact, while over 62% of the S&P 500 remains firmly in loss territory year to date, the remainder has pulled the entire index back to nearly positive returns. However, when we trace the root cause of the 2000s Tech Wreck, we see that there are few parallels to draw to today’s situation beyond the word “Tech” and inflated Price-to-Earnings multiples (the ratio of how much a stock costs to how much the firm earns per share).
The 2000s were characterized by businesses who had little more than a tangential relationship to the Tech world. Most of those businesses were trading on name alone, in fact, with almost no balance sheet strength, no assets, no diversification and no rational reason to own them. However, it’s really hard to resist buying explosive growth when markets are surging and the net result was that a lot of investors were left holding the bag when the truth about how fundamentally bad these investments were finally came to light.
Today, Tech is dominated by massive multi-national firms that are firmly entrenched in our day-to-day lives. Companies like Facebook, Apple, Amazon, Netflix and Google are all incredibly large, very well diversified businesses with jaw-dropping amounts of cash on hand and balance sheets poised to weather any turbulent markets without collapsing. While there is always risk investing on the small end of the tech space (IPOs being a great example), portfolio managers such as Fidelity’s Mark Schmehl have unique mandates where they seek intelligent exposure to good business ideas in Tech, rather than just buying anything that has ‘Tech’ in the name or business plan.
Long story short, the world of Tech today is not the world of Tech 20 years ago and we don’t see that segment of the market collapsing. Managers like Mark specialize in knowing the difference between owning Zoom (because they’ll have a place in the future business world; one of his big ‘wins’ in 2020) versus buying a Pets.com in February 2000 at their IPO (an IPO that resulted in a 98% loss over 11 months all due to speculative investors’ lack of research into the underlying business and future prospects). Pullbacks and corrections are always a reality, but utter collapse shouldn’t be.
What about the Presidential “circus” election?
If you’ve opened a newspaper, clicked a Reddit link or listened to the news in the past 10 months, you aren’t likely to be surprised that things are heating up south of the border. As the US approaches the most contentious election in recent memory, a lot of eyes are on the ways the markets in the US (and around the world) will react to either candidate succeeding.
Putting aside politics, preferences and personal beliefs, the markets have a lot of ‘opinions’ that get tossed around in election years. There are traders and investors who believe that the Republicans will benefit the market due to lower taxes and pro-business policy (as we’ve definitely seen under Trump). There are also traders and investors out there who point at the substantially better overall gross market performance under Democratic administrations and cite public spending and other reasons for markets posting overall better returns under the Blue team.
Long story short, there are a few realities we’re likely to face:
- September is usually a down month (the “Q4 Crush”) for markets, but in presidential years the award for roughest month is typically October as it precedes the vote in early November.
- Volatility during election years is typically higher across the board as uncertainty peaks.
- Regardless of whether the incumbent wins or the challenger takes it, markets tend to under-perform during the first year of the 4 year presidential term as markets figure out how to price things for the new mandate.
While some managers like Schmehl are of the opinion that the election will be a ‘non-event’ that passes the markets by without long-term turmoil, we have some time tested methods that can be used to help cushion against volatility.
Cushioning Volatility:
A few tips and tricks for protecting yourself from the short-term ups and downs:
- If you have a spending goal that is coming up in the next 10-12 months, make sure those funds are kept conservatively invested so that they don’t experience huge swings if the markets do.
- If you are entering the market with a sizable contribution, consider spreading that investment out over several months to help ease entry into volatile markets.
If you are withdrawing a retirement income, we usually make sure you are set up with the correct portfolio to begin with, but if you have any questions about what this might mean for an investor in the income phase please do feel free to reach out.
Meetings:
As always, we are happy to discuss your plan, your investments or answer any questions you have. We are available for telephone calls and video calls whenever you need.
Thank you for your continued support – we hope everyone stays safe and healthy.
