Months that Last Years:
What a month… April has seen the spread of massive changes to all aspects of our lives – personal, professional and economic. As the COVID-19 pandemic continues its spread, hugely unprecedented public policy response in almost every country around the world have resulted in disruption on a previously unseen scale. New terms like ‘Social & Physical Distancing’, ‘Self Isolation’ and ‘Quarantine’ are part of our every day vocabulary and the new normal has proven a hard change for many Canadians.
As always, these updates are to help inform you of what markets around the work have been doing over the last few weeks, as well as some useful tips and resources that might be helpful for you and your families.
“Relative” Performance:
In our last update, we stressed the fact that not one of our clients owns the ‘market’. After chatting with many people in the last few weeks, we have further stressed the fact that the vast majority of investors do not see performance that matches the commonly cited indexes like the S&P 500 or the S&P TSX Composite – these are great bellwethers for equity markets in general, but very few people have all their eggs in those baskets.
When markets are down 14% and 16.7% year-to-date* (S&P 500 and S&P TSX Composite respectively), it’s a lot more useful to know that average balanced** investor is only down an average of ~7% over the same period. This is true for every level of risk – safer portfolios are generally going to be down even less (or possibly even positive) and more aggressive portfolios might be down the same or more (but positioned well to experience an eventual large upswing).
When we then put performance in a longer term context, it further smooths out the anxiety one feels when looking at very short term performance.
* Morningstar Global Neutral Balanced Category
** Yahoo Finance – ^GSP & ^GSPTSE Price return as of April 23rd, 2020.
What the heck happened to oil prices?
On Monday April 20th, the world saw something they hadn’t seen before – a barrel of oil with a price of -$40. What that means is that somewhere in the world, people who owned a barrel of oil were conceivably paying buyers to take that oil off their hands. That left a lot of people confused and asking whether this was truly a sign of apocalyptic economic times.
The short answer is no; this wasn’t the end of days for the economy and certainly not for oil in general. This price dislocation was due to the nature of financial instruments called Futures. If you ever watched Trading Places with Dan Akroyd and Eddy Murphy, you might have heard of Futures before.
In a nutshell, there are two sides to a futures contract: a Seller and a Buyer. The Seller wants to lock in a price for oil in the future (say for delivery in May 2020) so that they don’t have to worry about what the rest of the market thinks their oil is worth a month or two from now. The Buyer, on the other hand, figures that the ACTUAL market price for oil in May will be higher than it is today – they will then be able to sell that oil to someone who actually wants to accept delivery of a tanker/pipeline full of crude for a higher price than they paid. This is the heart and soul of speculation in commodities – sellers & producers who want to avoid volatility and buyers who speculate prices will increase before the futures contract expires. The problem is that the vast majority of those who speculate on commodities never have the intention or the means to actually take delivery of the final product.
So what happened Monday? Speculation isn’t new, after all. Well… a perfect storm of extremely low prices, very high levels of supply and (perhaps most critically) a total lack of storage for West Texas Intermediate crude oil came together to shake up the futures markets. Speculators on Wallstreet were suddenly faced with the prospect of actually having to accept delivery of thousands of barrels of oil in May if they were holding onto those futures when they expired on Tuesday. With no one who actually could use that oil willing to give them the $12-15/barrel they bought their futures contracts at, these traders started offering their oil cheaper and cheaper and, ultimately, offering to pay people who could actually use or store the oil to take it off their hands.
This was a really confusing and insane thing to see on news headlines if one isn’t familiar with futures markets, but the extremity of that dislocation has more or less corrected, with June WTI futures back to trading around $17/barrel as of Friday afternoon. We are still likely to see volatility and a relatively low price for oil due to the COVID crisis causing extremely low demand in all sectors, but hopefully we won’t see speculation drive prices below $0 again any time soon.
Market Update:
Many conversations these days start with some variation on ‘How are you doing?’ with a silent-but-implied ‘In spite of everything going on in the world?’. A lot of our time these days is spent talking to portfolio managers, calling into conference calls with analysts and making sure we’re up-to-date with how different investment markets are positioned now and for the future. Their initial statements always have the same sort of sentiment – trying to find positivity in the face of disruption.
Fixed income markets have seen ‘spreads’ (a term that refers to how the market is pricing in default/credit risk compared to less risky government securities) widen to levels unseen since the Great Recession in 2008/2009. Implied in these spreads widening is an increase in higher risk borrowers simply not paying off their bonds – defaulting on their obligation. While there is no real question that defaults will rise, many trust fixed income managers are of the opinion that these spreads have created attractive buying opportunities where you can acquire a still-viable company’s debt for a bargain. There’s little question, however, that avoiding more volatility in fixed income markets will be a challenge in the coming months.
Equity markets, both domestic and abroad, have started to smooth out a bit as fiscal and monetary stimulus efforts such as the CEBA at home and the COVID-19 bills in the US have started to bolster some of the extreme demand-shock that economies are experiencing. With people unable to leave their homes and engage in commerce, companies of all sizes are struggling to pay their fixed expenses without any revenue coming in. While there are some winners in the new normal such as those companies enabling work from home, the base case for this causing a recession is looking more like a reality.
There is comfort to be taken, however, in knowing that even extreme recessions don’t last forever. With unheard of levels of stimulus and aid being rolled out to soften this situation and, eventually, healthcare solutions like treatments and vaccines to eliminate the threat, there will be a day where we look at early 2020 as a rough patch we’re glad we left in the rear view mirror. Remember how dire things seemed in March of 2009 and how infrequently we think about those days today. This too shall pass.
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. Just forgive us for having longer-than-normal hair!
Thank you for your continued support – we hope everyone stays safe and healthy.
