Schneider Insurance Update

As you may have seen in the news, markets are down fairly significantly and we’ve now moved into Bear market territory.  So we thought you might appreciate our thoughts in between newsletter issues.

 

Last week the Federal Reserve in the U.S. issued the largest interest rate hike in decades and it’s caused a fair selloff.  While we’ve been expecting a considerable pullback for some time, this one has not disappointed.  

 

And although these things are never fun to watch,  it’s actually been a long time since we’ve been so excited about equity market valuations.  Things are reasonably priced for the first time in a long time. 

 

Interest Rate Hikes Often Spook Markets

Unfortunately, for those who like to watch markets on a day-to-day basis, times of turmoil can be stomach wrenching.  Simply put, no one likes to see their investments go down in value. That said, it’s in these times, when we see big pullbacks in market prices, that the best valuations appear and the opportunities become evident. 

 

Remember, history clearly points to the fact that markets work much like a pendulum on a grandfather clock. They move from a position of being overvalued to undervalued with regularity over the years.

 

And it is during these periods of weakness that investors have historically had the best opportunities to purchase shares in the greatest companies in the world at significantly discounted prices.   So the question on many people’s minds is,  “Is this the right time to be piling into equities aggressively?”  Our answer… Despite the considerably bearish sentiment that seems predominant as of late, we think not just yet.  Here’s our rationale…

 

Our Approach

 

Over the past couple of years we’ve largely been holding off adding to pure aggressive equity positions because of their valuations.  This excess has shown itself across asset classes from stocks, to unrealistically rising home values, to investors gambling in cryptocurrencies (which have been crushed as of late). 

 

For the most part, your portfolio managers have done a good job reducing downside risk.   And in most cases, they’ve been able to avoid portfolios dropping to the degree that the market has. 

 

 

A Bear Market

 

That said, we’ve just entered a Bear Market.  As opposed to a Bull market, a Bear market is defined as major markets dropping by more than 20% from their previous highs.   As mentioned, this one has largely been triggered by a significant central bank rate hike aimed at taming inflation.  

 

While Bear markets have on average lasted less than 18 months, some investors have been asking us why not invest large sums now and just wait it out?  While it’s entirely possible that we may see a large rally as soon as inflation shows signs of a downturn, we’re not entirely convinced it’s going to be that easy. This is because there is so much more to what is driving prices than just an overheated economy.  And because many of the factors are out of central banks’ control, there is a risk of rate hikes actually making things worse before they get better. So while we think that there are great opportunities out there, we’re advocating a long-term dollar-cost averaging approach to take advantage of them.

 

Here are some of the things that are factoring into our consideration…

 

Oil Prices

 

Rapidly increasing oil prices have been the cause of many a recession. For every dollar of oil price increase, there are correspondingly Billions of dollars that come out of consumers discretionary income – which is fixed. That means if they’ve got to put gas in the car to get to work, that money has to come from somewhere.  It generally constricts both their extracurricular activities and the economy at the same time.  

 

COVID 

 

Covid continues to be a worry.  While it has faded from the headlines that it once dominated a year ago, the long-term repercussions of money borrowed (printed) along with the ramifications of Long Covid are significant.  The economic fallout created by the vast sea of people that are having trouble getting back to work is huge.  And it will continue to weigh on our disability and pension systems for decades to come.

 

China’s Zero-Covid policy has also brought Chinese manufacturing down dramatically.  And they appear in no rush to quickly open things up and risk large-scale infection.  Thus dramatically fewer products on the market driving continued inflation.

 

Finally, Covid has caused havoc in supply chains worldwide, causing a major reduction in the availability of goods.  Even though things have improved to a degree on the supply chain front, we’re a long way off the efficiency and competition that kept prices down before. 

 

The War in Ukraine 

 

Then there is the war in Ukraine.  It is not only driving oil prices, it’s also driving food prices through the roof.  At this point, there’s no concrete plan as to how to get the grain much of the 3rd world needs to survive so this should too drive inflation.  It’s also to be noted that oil prices are a major contributor to food costs, so as long as the war continues, expect inflation to run hot.

 

Note:  We wrote in our last issue about this being an energy war.  Russia has effectively decided to either take or destroy the West’s $45 Billion energy infrastructure they’ve invested in the region.  As Russia’s economy is significantly based on oil and gas, Western competition is an existential risk to the country.  Accordingly, we’re expecting problems for a long while.

 

Stagflation

 

In effect governments are stuck. They need economic stimulus to keep the economy from going into recession, but that same economic stimulus is causing increasing inflation.   So we’re left with the real potential for stagflation, where the global economy stagnates but inflation persists.  


Governments feel the need to do something.  They’re reaching for rate hikes because that’s what they’ve always done, but rate hikes are a blunt instrument.  One that wounds many in their path.  Unless evenhandedly applied, interest rate hikes can easily do as much or more harm than good. 

 

So what’s a savvy investor to do?

Markets when viewed in the short term can be misleading. Taking a longer view gives us a degree of optimism for those ready to invest via dollar-cost averaging.   Consider these numbers even after the downturn we’ve seen…

June 17 – June 17

 

  • The TSX year over year is down by 5%
    But it is up 16.1% over the last 3 years
  • The Dow Jones is down 11% year over year
    But it is up 11.9% over the last 3 years
  • The S&P 500 is flat year over year
    But it is up 24.5% over the last 3 years

 

It’s said that it’s never wise to try and catch a falling knife. With governments around the world rushing to increase interest rates, nobody really knows when we’re going to see a large-scale recovery or when we’ll see a market bottom. That’s why we don’t feel it’s wise to aggressively invest new money all at once right now. 

 

Dollar-cost averaging is usually the safer approach.  Historically, anyone who is able to get in and buy up the bottom of the markets (typically by using a monthly dollar-cost averaging approach from 12-24 months) usually does exceedingly well 5-10 years out.

 

All of this will play out in the long term.  Mankind always seems to overcome in the end.  In the shorter term, however, expect turmoil and lots of it.  Once again, it makes sense to have a plan to take advantage of the situation, rather than being taken advantage of. 

 

Call us anytime you like. 

 

Mark and Sean. 

 

About The Author

Mark Schneider
Mark Schneider is one of Canada's leading Chartered Financial Planners. For over 30 years he has helped hundreds of regular Canadian families grow small fortunes through consistent planning and wise advice. He holds the following designations: CFP, CLU, CHFC, CFSB