- the source for market opinions


March 12, 2020 | Corona Time

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

We were in the eye of Dorian. The winds of 130 km/hr were ripping shingles from the roof. The basement sump pump was heroically losing it. Rivulents down the road had turned into a river. The hurricane went on for hours, each worse than the last.

“Hey, pal,” I said cheerfully. “Wanna go for a pee?”

Bandit opened one eye and gave me that look. ‘Are you out of your freaking mind?’ it said. And that was all. Roll over. Dogs know.

Well, here we are. The big storm. Venturing into it is foolish. Too late to sell. Too early to buy. Unless you’re epic. Best to sit this one out, riding the roller coaster lower, then letting it carry you up when the sun returns. And it will. Pandemics don’t last. Oil wars never do, either. The world isn’t ending. Just normalcy.

So the virus got real Wednesday night when Tom Hanks got it, the NBA shut down and wheezy Trump scared the crap out of investors. As he spoke futures sank. Where Mr. Market wanted emergency containment (since US virus testing has been virtually non-existent), he got an airline-killing European travel ban, faint stimulus and wall-to-wall uncertainty. The next day stocks sold off Biblically, Trudeau self-isolated (convenient), hockey went dark, Ontario schools closed  and everything tumbled. Stocks, Bonds. Gold. Oil. Dollar. Crypto.

“Risk Off. Risk Off. The 11 year Bull market ended more quickly than anyone has ever seen. The Dow declined at the fastest rate since 1933. We are in the grips of a Pandemic Bear,” was the histrionic take of one veteran Wall Streeter. People were taking no chances as high-frequency traders, the algos and the hedgies whacked the Sell button.

The fear? It’s not about health, but disruption. Trump pushed us a lot closer to a global recession with the complete disruption of the America-Europe supply chain. Recessions bring lower corporate profits, higher unemployment, bigger deficits, falling rates and negative growth. And while central banks will hack the cost of borrowing and inject stimulus while governments cut taxes and goose spending, nothing can match the speed of a virus. It took China six weeks of historic, draconian measures to quell this thing. America has not even started. It’s why Mr. Market is also looking at Trump and wondering if the guy will actually be around past November.

Well, let’s talk about investments. Overnight my suspender-snapping, omniscient, fancy portfolio manager colleagues and I did another asset allocation review. The process is endless, and leads to incremental but meaningful changes. I asked Ryan Lewenza to summarize some of the moves we took before the virus landed.

We were calling for an increase in volatility this year but this is getting a little out of control! Thankfully we’ve been systematically and proactively reducing risk in the portfolio over the last few years to help to minimize the downside against these market downturns. We did this for two key reasons. First, with the bull market reaching its 11th year anniversary in 2020, this current economic/market cycle was getting older. Second, the risks remained elevated, in our view, as we’ve had to contend with things like the US/China trade war, Brexit, Iran, Hong Kong protests etc. Given these factors we’ve been dialing back risk and as such our portfolio is as defensively positioned as it’s been in many years.

Our strategy to reduce risk started two years ago when we made the wise decision to switch our plain vanilla TSX ETF for a low volatility Canadian equity ETF. This invests in the lowest volatile stocks in the Canadian stock market and currently represents our single largest holding. It’s been a big winner for us as it’s been providing stronger returns in up years and less downside during market sell-offs.

Rounding out our Canadian equity exposure we have one ETF that invests in the highest-quality dividend stocks in Canada and our REIT position, which has been a great long-term holding for us. With interest rates dropping like a stone over the next few months this generally benefits REITs and is one reason why it’s down only 6% this year.

We then moved on to the US side of the portfolio making a number of changes to reduce risk. Two years ago we sold our US small-cap ETF and last year our US mid-cap position, resulting in the portfolio only holding large-cap US stocks. We also made the smart decision to buy a US healthcare ETF, in large part due to its defensive qualities. In market downturns the sectors that hold up the best are consumer staples (you still have to eat), utilities (you have to keep the lights on) and healthcare (still need drugs and go to the hospital).

Finally, late last year we had to address the international side of the portfolio where we introduced an ETF that invest in “high-quality” international stocks. It screens all the international markets for the highest quality stocks and this switch was very timely as it’s significantly outperformed the international ETF we previously held.

In summary, while we did not anticipate this virus/pandemic and the impact it’s having on the economy and markets, we have been proactively reducing risk in the portfolio to help soften the blow against this current downturn. While our portfolio will not be immune to this temporary market decline, it is currently positioned as well as it can be given our defensive positions.

Of course, the portfolio is also balanced, holding 40% in safer assets such as government, corporate and provincial bonds which have zipped higher in value as rates drop. The preferreds have lost capital value as the cost of money falls, but they pay a chunky, regular dividend of almost 5.5% and will soar once CBs start backing off, post-Covid. The next move, underway now, is to trim bonds that have soared and nibble equities that have tanked.

So, yeah, the roof is intact despite the blow. It’s not over yet. Not close. Stay invested. Wash your hands. Hug your Charmin. Don’t do stupid stuff.

Listen to Bandit, and hold it.

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March 12th, 2020

Posted In: The Greater Fool

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