It’s apparent that the volatility that we’ve been both expecting and have talked about for the last two years has arrived.
After a brief rally, the last five days have once again knocked off all of this year’s profit (and a bit) from stocks. They’ve also sent markets into correction territory, as the potential of both a pandemic and an ensuing recession sets in.
Apart from the potentially devastating health consequences, it’s a particularly challenging problem because the virus hits both sides of the economic equation – both the supply and demand side at the same time. Here’s why this is important…
If demand is stifled (due to fear, inability or unwillingness to move around, associate and do business), then rounds of cutbacks – well beyond what we’re seeing today, could eliminate disposable income, and quickly. Goods not moving, whether it be out of port or on oil rail lines, means inevitable shortages down the road which in turn may bring about Stagflation – where there is high inflation with a flat or declining economy.
While it’s difficult to call any recession typical, previous economic turndowns have been evidenced by a pullback in spending due to limited consumer cash flow. This has been typically rectified by governments lowering interest rates, freeing up consumer capital, which over time largely restarts the economic growth cycle.
We’re in a slightly different situation here because right now. International trade is really not flowing to any substantial degree – in large part due to the very need to quarantine people to contain the outbreak itself.
Since the SARS virus, China’s economy has grown fourfold. More importantly, it has become almost inextricably intertwined into the world’s supply chains. China is by far the manufacturing engine of the world for everything from iPhone parts to garlic and in between.
But while you may be able to grow your own garlic, Apple needs to source parts from over 200 manufacturers to put together an iPhone. It is a little more challenging, with suppliers at times out of raw materials themselves – and going out of business other times.
(And while our first instinct may be to think, well “I don’t absolutely NEED another iPhone,” it brings to bear that one day your health may actually depend upon you getting testing and thus early treatment via your phone for this or something else – just as it’s proving the case with Apple’s heart partnership already. So yes, as exhausting as it may seem, as a society we really DO need to move along as fast as we can – our species survival may now actually depend on it).
As these types of supply chain problems are showing up in the majority of major industries, over the next year global corporate profitability growth (and certainly profitability itself), is likely to get hit hard – if not by the economic impact the virus has created, by the potential swing to the left politically in the U.S. this coming November. So we have some challenging times coming.
Where We Are
To date, our portfolios have fared respectively well, given the flight from stocks has been somewhat offset by gains in government bonds held by balanced funds. The government based income portions have acted as somewhat of a ballast respectively.
And Canada is in a better position than most countries given that it is one of the few countries with both a AAA credit rating and a positive yield on its bonds. (Many European countries, which are still considered stable risks, are already in a negative yield environment, making them less attractive). All the same, Canada’s reliance on traditional resources compounded with the recent rail strikes, are likely to put downward pressure on the Canadian dollar over the shorter term.
Yet, despite the doom and gloom, on one hand, however, really nothing has changed for long-term investors. There is still a fundamental need to outpace inflation with one’s money. Governments (many of whom have the most to lose) will almost certainly free up capital by printing it or lowering rates, knowing that in low-interest-rate environments, both equities and economies tend to rise over the long term.
To sum up, we are both concerned and are watching the fluid situation actively. That said, we’re grounded in a belief in both the health system and the reality of past market corrections and the inevitable opportunities they eventually present. The world’s best scientists all over the globe are working on this day and night with all the A.I. they can throw at it. As such, it’s inconceivable to think that they won’t be able to arrest the spread at some point. So, over the longer term, we expect there will be opportunities to add to positions in some of the world’s best companies as they once again become outstanding buys.
Accordingly, for our longer-term investors, an appropriate strategy of holding tight to their relatively conservative positions still makes sense – while even adding to them during the downtime.
One last consideration. Because this time it really is a little different…
Things are fluid and changing daily. But at this stage it would seem that an ideal time to add extra cash to equities is when a) we see both a likely end (or at least stabilization) of the outbreak and b) when we start to get some sort of guidance as to where the U.S. election may be heading this next coming November.
And finally, we do have a suggestion, as to where investors may want to deploy any extra capital they have…
On that note, one of our core team members has put together a more personal article on how preparation calms worry, which is particularly suited for today’s times.
It’s a bit of a read but what you’ll see is that by investing in preparation you’re able to use some capital to dissipate worry. We’d suggest you take the time to give it a read and some consideration.
As always, if you’re overly concerned, we’re always here to talk.
Mark, Sean, Cass, Simone & Nancy