Silent Interlude

DOUG  By Guest Blogger Doug Rowat


Let’s drill down through a few more nerd layers with this TI blogger.

Growing up, I was a fan of all things G.I. Joe—action figures, TV shows, movies and, naturally, comic books.

Almost everything related to G.I. Joe was, of course, pure farce, and in more recent years this has continued to be the case. (2013’s G.I. Joe: Retaliation starred Dwayne “The Rock” Johnson, for instance, and has a 29% Fresh Tomatoes score.)

However, Marvel Comics’ G.I. Joe issue #21, “Silent Interlude”, somehow managed to break with the franchise’s cheesy tradition and become iconic for its originality. It was an issue without words. No dialogue whatsoever. Just visuals…and almost complete silence. To this day, it’s considered groundbreaking.

Snake Eyes/ silent airdrop

Source: Google images

Needless to say, there has been enough media ‘noise’ surrounding the Coronavirus. Investors have been loudly pumped up with more fear than a teenage girl at Camp Crystal Lake. So, in the spirit of G.I. Joe issue #21, I present a blog post with a minimum of words. Instead, just the most compelling images that I’ve come across in the past month. ‘Nuff said. Enjoy the silence.

Epidemics and the S&P 500: history suggests markets will sort themselves out

Source: FirstTrust, *12-month data not available for June 32019 measles

An overreaction? Week-on-week % change in S&P 500 – only four events since 1940 have resulted in worse sell-offs… and one involved Hitler

Source: Refinitiv

‘Epidemic’ news-cycle lifespans tend to be incredibly short. A few examples:

Source: Bloomberg, Turner Investments; number of Bloomberg news stories with keyword “Ebola” and “Swine Flu” respectively

Timing the market is pointless: hypothetical investment of $100,000 in the S&P 500 index over the last 20 years (2000-2019) – a few missed good days will cripple performance.

Source: Blackrock. Missed days refers to top-performing days

Fed cut its overnight rate 50 bps earlier this week. Previous instances where the overnight rate was already this low (or close to it) followed by a 50 bp cut each proved to be positive catalysts for the market

Source: Bloomberg, Turner Investments. Reflects past 30 years of Federal Reserve action.

Finally, the news media will never keep things in perspective. Ignore them.

Source: CD, American College of Cardiology, Turner Investments

Next up: the comment section. Thus ends the silence.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.



Shelter in place

Good jobs numbers last month couldn’t keep stocks aloft on Friday. Mr. Market is still trying to figure out how much damage that gnarly little germ will do to the economy.

As equities swoon, money gushes into bonds. Safe stuff. For example, a boring bond ETF like XBB has gained about 6% this year while stocks have plopped. Bond prices rise when trouble comes to town. And as prices go up, yields go down. The debt market is also repricing risk, now signalling now a recession looms. When that happens corporate profits fall, equities reflect it and people shelter inside bonds – no matter what they pay.

So this is a unique time. Central banks cutting. Primes, mortgages and savings rates on the decline. Government debt – considered to be a “risk-free” asset – in big demand and yielding next to nothing. The return on the benchmark Government of Canada bond, for example – at just eight-tenths of one per cent two days ago – has collapsed to six-tenths. In fact the same bond that paid 1.7% at Christmas is now at 0.66% – a drop of more than 60%. In ten weeks. Stunning.

Down she goes! Canada bonds lose 1% in weeks.

Investors are pushing yields towards zero as US Treasuries hit a new record low. The rush into bonds is now at historic levels. People can’t get enough – you know, like toilet paper.

This weird behaviour is likely to last for a while longer, and I hope it underscores the wise (but oft-maligned) advice on this pathetic blog to always have a strong fixed-income component in your portfolio. Government bonds. Corporates. Provincial debt. Together with a little cash this should be about 25% of a balanced account. Nobody owns bonds anymore to collect interest. They’re there as a shock absorber in normal times, and for growth when everyone loses their mind (that would be now).

So, what next?

Lower rates, that’s what. The Bank of Canada ain’t finished, even after that blockbuster half-point raspberry on Wednesday. The next cut looks like it will take place in April, with another one or two after that. Yup, a drop of .75% from now. Yuge. And American rates – already lower than ours – are headed for the big goose egg.

This means if you’ve been shopping for a GIC, lock in now – even though that’s no long-term way to fund your retirement. As for mortgages, variables are hot since loan costs drift lower with the central bank and prime rates. With 2020 destined to deliver two to four more declines, this looks like a no-brainer choice. These days VRMs are in the 2.2% range and five-year fixed mortgages are 2.4%. Both are headed south. So if you’re getting pre-approved make sure you have a commitment to pass through any declines prior to the closing date.

Earlier we speculated what this might do to the residential real estate market, especially in Toronto, Ottawa, Montreal and (to a lesser extent) Vancouver. More buying power unleased. A lower stress test hurdle. Unfettered hormones, just in time for rutting season – and when listings have been scant. It’s a recipe for bubble prices, multiple bids, blind auctions, happy realtors and billions more in new mortgage debt. Sadly, it will push home ownership further away for many.

But we also need to understand stock markets do not fall nor bond prices spike in isolation nor without consequence. Canada’s run into big headwinds lately. The crashing price of oil. The FN protests and damaging rail blockades. The pipelines bottleneck. Political polarization. The clash between climate change and the energy sector, resulting in a flight of capital. Now the virus.

Yeah, home loans are cheap. Historically so. Going to get cheaper, too. But recessions bring job losses, and this may be a poor time to choke down a bulging wad of debt.

Maybe you should wait. There are better opportunities, less risk. Like selling bumwad and baby wipes from your van. Seriously.




So, here’s the good news.

The prime rate at the Big Banks just eroded nicely, down a half point to 3.45%. That means consumer and car loans cost less. The rate on your line of credit just dropped. Ditto for the HELOC. Five-year mortgages are moving close to 2.5%. One lender now has a 1.99% three-year offering. And variable-rate mortgages are a bargain – likely to move lower.

The mortgage stress test – diddled by Ottawa just weeks ago to make it less gutsy – is on its way to just 4.5% (given current bond yields). That’s almost a full point lower than a couple of months ago.

There’s bad news, too. Are you sitting?

Savers are being crushed. High-interest account will pay less than inflation. A 5-year GIC at the Big Blue Bank is yielding 2%. Yeah, also under inflation and you have to pay tax yearly on money you don’t get. Sucks.

When it comes to real estate, the plunging cost of home loans and the defanged stress test will unleash a lot of new buying power. Given the shortage of listings in most places, this translates into price pressure. We’ve already seen that in the last month. Big jumps in the GTA (17%) and Montreal (13%). The rash action by the Bank of Canada this week will only serve to make housing less affordable and undo three years of government efforts to get the hormones back into the gland. Unless, of course, the virus keeps all the buyers at home washing their hands and guarding their hoards of toilet paper.

Also bad news (maybe)?

Mr. Market has no idea how to price things at the moment. Stocks soared Monday, tanked Tuesday, exploded Wednesday and died Thursday. Thousand-point sessions used to be stunningly rare events. No more. Meanwhile bond yields have been driven towards zero and bond prices set on fire. Investors with balanced portfolios have seen equity holdings flip wildly while their fixed-income stuff appreciates. Now everybody should understand why you always hold bonds. Even ones that pay you nothing.

Does this portend crappy days ahead? And, if so, wouldn’t this be a really bad time to buy a house in Toronto and swallow a million in mortgage debt?

Ah, that’s the question.

Well, Canada’s in some trouble. Oil prices have fallen 30% and $45-a-barrel crude (world price) is a disaster. Especially in a country when we can’t even get a pipeline built. Meanwhile the FN goofs caused serious economic damage by squatting on rail lines, and the feds seem incapable of decisively dealing with the radicals. Warren Buffett just pulled out. There’s a huge federal deficit now and no path to getting rid of it. Government spending will have to jump if the economy stutters, just when reduced economic activity means lower revenues. And now, the virus.

The central bank move this week – cutting rates by a half point (more to come) – was about as clear a signal as you can get that the economy is sliding. Resource-rich Canada was hobbled by the climate change agenda of Ottawa, aboriginal demands and commodity weakness even before Covid-19 whacked demand by shutting down China, kicking the airlines and plunging crude.

This week I spoke with an experienced, talented resource engineer who for the first time in his life can’t find work in Saskatchewan. Meanwhile his condo in Saskatoon has lost a third of its value. “Trapped,” he said. “What am I supposed to do now?”

So low rates might look sexy amid a forest of condo towers in urban 416. Maybe more kids renting condos will be able to buy the same units, and go from being miserable loser-tenants to happy owners with giant debts. But make no mistake. Overall, this is not good.

What to do?

If you have a balanced, diversified, liquid and global portfolio, ignore the noise. It’s going to last a while. The virus will be here all Spring, into summer, maybe longer. Nobody knows. But it will end. Growth will continue. Pent-up demand will shove values higher, fast. Don’t try to time it, since you can’t. Missing the good days of recovery is a bigger hit than waiting through the bad ones.

Real estate? Nothing’s changed. If you need a house, and can afford one, buy. If you can carry a big mortgage without a job, go ahead. Jump in. But don’t buy into a weakening economy just because mortgages got a half-point cheaper. Don’t wade into debt because you’re pregnant, are suffering from FOMO or your mom’s beating on you. There are a number of negatives swirling these days which should keep reasonable people from wanting any more debt – no matter how cheap it comes.

And if you’re a saver?

Sorry. You’re pooched. You might as well spend it. But not on a cruise.



G’day, students. Ensure your emergency rolls of TPaper are safely padlocked in your lockers, then proceed to the parking lot to be hosed down by the bleach trucks. They’re waiting. After installing your N95s, safety glasses and nitrile gloves, we can begin. Full agenda today, so enjoy! Nothing to worry about here.

The Biden bulls:
That Trump dude is some smart. As you know, he started to whack away at Joe Biden months ago, using his son Hunter and the Ukrainian caper to destroy the only Dem with the creds to unseat him. Didn’t work. Led to impeachment proceedings, actually. And now Biden has risen from the ashes, phoenix-like, and Mr. Market is smiling.

As the votes were counted after Super Tuesday’s 14-state slugfest, showing Biden trouncing Bernie and his Sandernistas, Dow futures soared by hundreds of points. The primary voters did what the Fed couldn’t, which was to restore investor confidence. Maybe the virus is still here, but the commies have been dealt a big blow. Sanders was the most virulent anti-corporation, pro-tax and socialistic person ever to get that close to a presidential nomination.

Now the Democratic machine has kicked into gear. Today Bloomberg was the final Biden conquest, so you know what November will bring. The MAGA army vs the Centre. America may not have lost its mind, after all.

Bankers cut big, T2 frets:
Right on cue the Bank of Canada offed its key interest rate Wednesday. No surprise there. But the bite was big – half a point, to match the Fed. Another cut expected in April, too. Ours is the latest central bank to reduce the cost of money, shooting stimulus in a global effort to counter the economy-shrinking impact of Covid-19. Expectations are US rates will drop a full 1% this year, and we should follow in time. Savers will be crushed. Investors ultimately rewarded. The real estate news will be sad (more below).

Here’s what they told us:

COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.

It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected. The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter.

In light of all these developments, the outlook is clearly weaker now than it was in January. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity.

So much for restraint.

The big loser is Mr. Socks. The federal Libs are in a pickle. Oil prices have collapsed into the $40 range, which just fuels the Wexiteers and underscores our energy sector failure. The FN goofs are still at it, and Dog-only-knows what Ottawa conceded to during those four days of talks in Smithers. It came out yesterday they didn’t even discuss the blockades. The virus has yet to land in Canada in any meaningful way, and the Cons are about to pick a snappy leader with political capital – who’s called for an October election. So the CB’s dramatic action is an admission the Canadian economy is pre-recessionary, while we sink into a voracious new deficit (which Millennials don’t care about). Did I miss anything?

What do Biden and McKay tell us about society? Suck it up, snowflakes. The Boomers are still in charge.

By the way, the yield on 5-year Canada debt is now eight-tenths of one per cent. Pow.

When Demand meets Supply:
This week we got a buck-ninety-nine three-year mortgage. This blog forecast that a fiver would be available during rutting season also at 1.99%. And it’s surely coming after the big BoC chop (plus another one in a few weeks) for the reasons spelled out above.

Already cheap rates and a paucity of listings are propelling housing markets back into bubble territory. Sad news, given the fact urban real estate is becoming the preserve of the wealthy. But the combination of cheap loans and a fearlessness on the part of house-lusty borrowers, plus owners afraid to list, is relentless. In the GTA sales are up 45%, listings down 33% and houses are 16% less affordable as a result. The average is now $910,000 and for detacheds it’s $1.485 million.

Even in tax-riddled Vancouver, in the province of Horganistan, sales are up 45%, available properties reduced by 21% and prices up slightly. Despite all of the market-killing initiatives introduced there by the Dippers, cheap money and raging hormones have broken through.

Well, this will get worse unless the virus runs amok and shuts down open houses. After a federal election in which every party came out with dumbass policies to stimulate more demand for real estate (which was already beyond the grasp of average folks) what do we expect?


Okay, kids, that’s it for today. Back outside for a re-rinse.  Tomorrow we’ll focus on root veggies and field surgery. Have a nice night.



Living with stupid

Silly people storming Costco. Hoarding toilet paper. Amassing bottled water. Vacuuming shelves of rubber gloves and useless facemasks. As the media drumbeat about the virus continues and grows louder, all perspective is lost.

Yes it’s new and scary. Germs be like that. But look at China. A country of 1.4 billion with fewer than 80,000 cases, where daily infections are now plunging. The epicentre of Wuhan has 11 million souls, most of the cases and a few thousand deaths. If that’s about the worst it gets – with 99.8% of the population surviving this thing, then are people in Burnaby in a flap and Hoovering local stores?

What drives rational people to speculate two-thirds of humanity could be infected and hundreds of millions fall over?

Fear, of course. Fueled by social media and stoked with ignorance, the virus crisis advances.

“My students are scared to death,” says blog dog Carol, who teaches at a post-secondary institution. “I think you can check the validity of all that I am telling my students – and if true, with your huge following, it might be worthwhile if you could get it out there.  Reducing panic is one of the critical first steps in dealing with this virus when/if the time comes.”

Here is her letter to the students:

This virus has been over-hyped – 1.3 billion Chinese and fewer than 100,000 have contracted it.  About 3,000 have died since December – more people die of traffic accidents every day – Nearly 1.25 million people die in road crashes each year, on average 3,287 deaths a day.  The flu, which you are far more likely to catch, kills 3,500 on average every year in Canada and the 2018-2019 flu season killed over 34,000 in the US – yet no one panics every year as we enter flu season.

Next, COVID 19 deaths, like for the flu, have been largely restricted to the extremely elderly and to the immune compromised – people more likely to die anyways – and to health care workers who are stressed, over-worked, and constantly exposed to the virus.  Driving, by contrast, kills and injures lots of young and healthy people – you should probably be far more afraid of getting into a car than of this virus.

So, if your cupboards are stocked in anticipation of the potential for stupid, and you follow basic hygiene – keep your hands washed whenever you go outside, or someone visits – you will probably be fine.  Don’t bother with masks if you are not ill – they are NOT designed stop a virus from entering your lungs.   The masks are instead designed to keep-in droplets when sick people sneeze, cough or snuffle – so, their primary use is for if you are already sick.  The benefit to a healthy person of a mask is to prevent you from wiping your eyes/nose with dirty hands.  This effect is easily copied – tie a scarf around your mouth and nose and buy a pair of safety goggles from Canadian Tire.  Don’t touch your face with your hands, unless you first wash them well with soap and water.

People are freaking-out because hand-sanitizer is sold-out at their local drugstore. It’s just alcohol … so buy a cheap bottle of really dry white wine or some rubbing alcohol  – put it into a small container – and voila, you have hand sanitizer! (In a pinch, perfume and cough syrup contain high quantities of alcohol, but (a) stink and (b) are sticky.)   That having been said, plain soap (don’t waste money on anything special) and water are far more effective than alcohol in cleansing your hands.

Okay, enough with today’s health tips. Nobody should fear death, since that’s unlikely (from the virus, anyway). But you should be worried about stupid. Hoarding instead of sharing is stupid, for example. Wearing a mask walking the pooch. That’s dumb. So is trashing your investment assets and going into cash. Or vexing, fretting or panicking about stuff you can’t control or influence.

Now, what about Mr. Market and your portfolio?

The news is this: central banks have started to react. As we told you they would. The Fed chopped its key rate a big half-point today and the Bank of Moosehead goes tomorrow. There are more chops coming, with US rates heading down again in the next few months and our guys trimming once more in April. As a result bond prices have jumped and bond yields cratered. The Canada five-year fell through 1% today…

US, Canada bond yields dive below 1% on Fed cut

The G7 finance dudes (including Chateau Bill) shared a conference call Tuesday morning and pledged to act together. Fed boss Jerome Powell had a presser to explain the rate cut. His comments that the mess would last “for some time” sent Mr. Market into a funk, igniting another sell-off since investors want a quick fix for everything. So, as this blog told you last week, the downdraft ain’t over yet.

But here’s the point me and Carol want to make.

You can wash your hands and stay healthy, but you can’t save China or the stock market. Understand that every time there’s a crisis it’s followed by a resolution. And emotion is not your friend. Especially fear. Carol’s students probably have no investment portfolios, and no financial exposure to current events. No jobs to lose. No skin in the game yet. But they’re scared to death – of a germ that even if they caught (unlikely to ever happen) they will survive (of course).

By the way, don’t bother posting scary, emotional comments about looming mass death. I’ve just sterilized my delete finger.



The big swing

Well, here we go.

On the weekend we told you CBs would not sit back and leave the world wheezing, coughing, fretting and snorting. Already the Bank of Japan has ponied up a pile of cash. The Chinese bank is doing the same. The US Fed will be cutting this month and the Bank of Canada’s expected to go on Wednesday.

It’s been wild. Wall Street futures opened down 800 points Sunday night, climbed into +200-point territory by dawn, then sank again. Then revived. Then soared. Mr. Market is trying hard to determine the correct level of risk in a fluid situation, and there’s no clarity yet. So big swings. Volatility will continue to spike, and central banks will move in to try and adult.

By the way, here’s this blog’s latest thinking (feel free to take notes): humanity is not pooched. Millions will not die. Covid-19 will get a vaccine (probably) and become the fifth widely-circulated and seasonal virus in the world that everyone just accepts as normal. Yeah, like the flu (which killed 56,000 Americans last year and 3,500 Canadians). Once the toilet-paper panic and mass work-from-home quarantines end, we’ll recover our perspective. Just don’t eat the wild life.

By the way, this prediction just crossed my path from a usually-credible source (Pennock Idea Hub):

We believe the global economy is undergoing a period of stress that will take some time to resolve. Asset prices are likely to be highly volatile for the next few months until the full extent of the uncertainty is resolved. In the short run, the stock market is extremely oversold and washed out. A relief rally and climactic price reversal can happen at any time. However, we expect any rally would be followed by re-tests of the old lows, which may not necessarily be successful.

So here’s the latest. Odds are running 70% or higher the Bank of Canada will cut its rate this week. Investors have fully priced in another chop in April. And there will be (the thinking goes) yet another after that. The central bank rate of 1.75% will become just 1%. And, by the way, the bond market has already arrived there – look at the yield on Government of Canada debt Monday morning. It actually dipped below 1% for a while:

Down she goes: Canada bond scraps 1% mark

So the prime will be going down, along with loan, mortgage, GIC and savings rates. With $45 oil, heavy losses on Bay Street, God-knows-what’s going on with FNs, and now the virus, BoC gov Poloz has no choice. This is 2015 all over again, when crashing crude sent him into emergency mode. Down came rates and 18 months later we had a real estate bubble so big – 30% yearly gains – that governments move in to beat it back.

So will the virus cuts do the same in the Spring of ‘20? Will people be buying houses in a panic because they’re seized with FOMO and hopped up on 1.99% five-year mortgage money?

Well, loan rates are going down. Sure thing. By how much remains unknown since cheapo rates hurt the banks, and the virus is doing them no favours as business activity slows and Canada’s resource sector groans.

Here are the GF reasons why cheap rates will make houses more affordable, but we’re unlikely to see The Bubble come back with the same gaseous impact as four years ago:

  • Falling financial markets spook people, even if they’re not investors. It prompts talk of a recession (a good likelihood in Canada, given the oil situation), which means job insecurity. That inhibits big-ticket purchases like a house.
  • The luxury end of the housing market is most susceptible to damage. Wealthy people buying $2 million or $3 million digs typically have a lot of financial market exposure. So current events have rattled them. Not good for sales. Trickle-down anxiety.
  • Chinese buyers? Fuggedaboutit. While the impact of foreign dudes with piles of money has always been exaggerated, they have nonetheless been one factor feeding prices. But the Chinese economy is a smoky hole right now and will take a long while to recover.
  • As for multiple bids resulting from packed open houses, that may not be happening in Toronto or Vancouver next month or into May. When people are lining up for hours to buy 3,000 rolls of toilet paper you know something’s squirrely.
  • So if (when) the virus spreads some owners will not want people trooping through their houses, throwing germs, cooties and micro-droplets all over the place. The flood of juicy new listings realtors were expecting this season may fizzle.
  • American realtors are yammering about an overall 10% price drop for houses in the next few months, despite an anticipated decline in US mortgage rates (where people can lock in a cheap price for 30 years).

As stated here on the weekend, nobody knows what comes next. Stocks markets have oversold. Volatility will reign. People are acting stupid. Rates are dropping. And it’s March. Make yourself feel better. Go get a puppy. Or a new car. It’s all good.


Facing it

Andy Seliverstoff photo

Ten years ago today, my time as a financial advisor dude began. That was after writing 17 books on money and real estate, spending eight years touring the country giving financial lectures, being a network TV business talking head and losing my mind twice, entering Parliament, where I even ran the federal tax system for a bit. (And was spanked by Stephen Harper.) Along the way I also owned stores, a publishing company, a few restaurants and inns and personally scooped thousands of ice cream cones.

Anyway, it’s been ten years doing this. I started helping people as the GFC was winding down and stock markets had lost 55% of their value. Next came the US debt ceiling crisis in 2011 and another market plunge. Oil prices collapsed in 2015 and the Bank of Canada went into emergency mode. Trump injected huge volatility the next year. Interest rates went to zero, trade wars erupted, Brexit happened, Hong Kong exploded, populism swept Europe, then we got the virus. Meanwhile there was mass migration out of Syria’s war, blizzards of locusts in Africa, climate change events, blood and chaos in Venezuela and the threat of trading nukes with Korea. And Iran.

During this time I did not stray in looking after folks. No individual stocks. No stupid-fee mutual funds. No trying to be the smartest guy in the room. Portfolios that were balanced (safe stuff and growth stuff), diversified (various asset classes, global exposure) and liquid (nothing locked up). The families I help all seem to have the same two goals: preserve my capital over time yet give me a decent rate of return. So be it.

In this decade a lot’s happened in my shop. Now there are four fancy-pants, suspender-snapping, financial hotshots looking after portfolios with about a century of mileage between them. (Doug and Ryan are the big cheeses.) Also two certified financial planners, two full-time traders, half a dozen admin people, plus me and Bandit. We told folks we’d try to get them 6% or 7% a year on average, and so far that’s exactly the case. Plus chop their tax. Set long-term plans. And, naturally, hand out excellent marital, relationship and child-rearing advice.

Turner Investments is now in the top 3% of financial advisory shops in North America. But what makes me happy, most, is that 98% of people I ever helped are still in the family.

Now I mention this meaningless little anniversary not as a commercial for my day job. That’s not what this blog is about. Instead, to remind that the world is endlessly volatile and people are always freaking out about something. The virus is today’s catalyst. It’s different, of course. Unpredictable. Scary. The public health response has been an economy-suppressor, first in China, now in Italy and the same may occur anywhere, including the US. The threat to most of us is not sickness and death – that’s statistically inconsequential – but this thing can erase profits, jobs and GDP.

Neither you nor I know what happens next. But we didn’t in 2008, either. Or 2011. Or 2016. Or with Y2K or Nine Eleven. Lots of days in the past have looked grim.

The odds are a vaccine will be found, the virus relegated to the status of measles (Mr. Market doesn’t worry about that) and pent-up demand will be unleashed, restoring asset values. That could take months. A year, maybe? No idea. But in the meantime all of the lessons this blog has been imparting recently are worth remembering. Never sell into a storm. Do not crystallize losses. Ignore the doomers, preppers, ammo pumpers and media wusses. Don’t look at your RRSP or TFSA every four hours. Have confidence things will eventually normalize, and faith in humanity. And get ready for a lot of things to happen…

This week the Bank of Canada will chop its key interest rate. It will happen again next month. In fact, it’s even possible the slice on Wednesday could be a half-point (that’s a big deal). The prime rate, mortgages, HELOC rates, savings account returns plus GICs will likewise head south. With oil in the dumps, the damage FN protestors have done and now the virus, our guys have no choice. Down she goes.

US rates are also poised for a drop. Look at the Fed’s statement on Friday. The bank’s next rate review meeting isn’t until the third week of March, but it won’t wait. Expect news of a rare unscheduled slash in the next day or two. This won’t solve the virus problem, but it will signal central banks are taking this seriously and do their damnedest to inject stimulus into the economy.

And Trump? He’s morphing fast. A week ago he muttered the virus was a plot against him. This week he’s announced more travel bans, and may reduce tariffs on Chinese goods while launching a tax cut process. With Joe Biden’s reincarnation this weekend, the president will be pulling out all stops to ensure markets restore by November.

US stocks have given up 13% in the last seven sessions. As mentioned here last week, there’s more to come. As stock prices fall, corporate valuations become more reasonable and in line with historic norms. Investors are rapidly pricing in a Chinese wasteland economy in the first few months of the year, a likely recession lasting a few months and zero corporate profits in 2020.

Massive quarantines, scared people, closed schools, travel collapse, stockpiling – all this will push huge amounts of demand into the future. Said one respected analyst in the weekend: “My belief is that this is a correction and not the end of the bull market. We are likely to have an economic shock here in the U.S., but I don’t believe we will get two consecutive quarters of negative GDP growth. Because we won’t get a recession due to the coronavirus, the bull market will continue.”

But, hey, like I said, nobody knows. It’s for this reason that today I’m doing what I did a decade ago. Calmly. Deliberately. Decisively. Stopping as required for tummy rubs and liver treats.



Buying opportunity?

RYAN   By Guest Blogger Ryan Lewenza


Let’s all take a big deep breath in and exhale. Then let’s turn off the TV with all those scary headlines, which will only stoke fear leading to emotional investment decisions. Finally, let’s remind ourselves of a few key investing facts – 1) 75% of the time US equity markets rise and on average return 9% over the long-run; 2) equity markets do sell-off from time-to-time, sometimes violently like at present, but they always recover; and 3) most investors still have years of market growth before retiring so this will end up being just a blip in that long-term plan and even for those in retirement, you’re not going to spend all your savings today so you have plenty of time for markets to recover from this recent sell-off. Now that we’re all calm as a Buddhist Monk, let’s take stock of this week’s market correction and try to make sense of it all.

I want to start today’s blog by helping readers get some perspective on this recent market decline. As Garth quoted me earlier this week “no one should be surprised by this sell-off”.

Since 2019 the S&P 500 and TSX had rallied an incredible 36% and 26%, respectively, coming into early February. Moreover, during this period there was little “give back” so with the huge gains and lack of market volatility, we were overdue for this pullback. You can see in the chart below that the S&P 500 and TSX have declined over 10% since the peak in February, but even with this correction, the S&P 500 and TSX are still up 23% and 17%, respectively since 2019. Sure 1,000 point drops in the Dow is scary but let’s not lose perspective of the larger trend.

North American Equity Performance Since 2019

Source: Stockcharts, Turner Investments
As of February 27, 2020

As markets head higher investors can become complacent and forget that equity markets often incur small pullbacks (greater than 5% declines), larger corrections (10%+ declines) and occasionally bear markets (20%+ declines). In fact, I crunched the numbers and on average the S&P 500 endures one 10% correction and three 5% pullbacks every year. So the 10%+ market correction since mid-February is entirely consistent with history.

And by the way I predicted this higher volatility in our market outlook. From our January 4th, 2020 blog post “That doesn’t mean we won’t see bouts of volatility and sell-offs occurring this year. In fact, I see the potential for higher volatility this year.” Admittedly, I didn’t see the Coronavirus causing this market pullback (or it being so violent) but this volatility is exactly what I called for in our outlook report.

So where do we go from here?

First let me state that I have no idea when this virus scare/pandemic will peak and get under control. But ultimately it will and the scary headlines will fade until some other scary thing takes its place. We’re currently in the “eye of the storm” but the storm will end. It’s important to remember this!

Looking back at previous pandemic scares such as the Ebola scare in 2014, the S&P 500 and TSX dropped 7% and 10%, respectively, but they then recovered in short order. Charles Schwab crunched the numbers of all the past pandemic scares and found that global equities are up 3% on average after 3 months and 8.5% after 6 months. As I said before, the storm will end.

Now what I’ll be focusing on to try to determine when the correction is over and when we’re “through the storm” will be the number of new Coronavirus cases in China and the Asian equity markets. Since China is at the epicenter, the bottom will probably start there.

Below is a great chart from Credit Suisse, which shows that the Hang Seng bottomed roughly one month after the peak in new SARS cases back in 2003. I think this could provide a similar road map for the current virus.

And on this front I am seeing some potentially positive developments. According to Johns Hopkins University data, the growth rate of new cases in China is slowing, which could be a positive first sign that we’re approaching the worst of this current scare. Now it’s spreading globally, which is the big concern, but we need to see a peak in Chinese cases before feeling confident the worst is behind us.

Asian Markets Stabilized One Month After SARS Infections Peaked

Source: Credit Suisse

Looking at the economic impact of this outbreak, it remains my view that this event will weigh on economic growth over the next quarter or two, but it will not derail this current economic expansion or bull market. In the US the labour market remains incredibly strong, confidence is high, manufacturing is potentially bottoming and the Fed could potentially cut rates adding further stimulus should their economy soften.

In China, Q1 will be a disaster as industry has come to a halt, travel is non-existent, while consumer spending will be greatly curtailed. But if, or rather when the outbreak fades, then economic activity should come surging back.

Finally, let’s step back and review the long-term trend of the US equity markets, which remains very bullish. Below is the technical chart of the S&P 500 and you can see that the recent decline has been relatively muted within the context and this incredible bull market and no major damage has been done to this trend. So yes we need to be vigilant in assessing the impact of this pandemic scare, but let’s not get ahead of ourselves as its not the end of the world and above all keep your emotions in check.

And if you still disagree with all this, then move way up north and buy lots of cans of tuna.

S&P 500 Remains in a Long-term Uptrend

Source: Stockcharts, Turner Investments
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.



The big ding

This story has been told before here. But tough. Listen to it again.

My first market bloodbath was in October, thirty-three years ago. I was the hotshot, know-everything, financial-guru-editor-columnist at a large daily newspaper. In my office was a big metal box which spewed a continuous ribbon of newsprint covered with breaking news headlines, market data and bulletins. This Dow Jones terminal was the candy-ass of technology at the time. It even had a bell. When something awesome was happening, it dinged at me.

So the bell started in the morning and basically continued all day. Markets were free-falling and back then none of today’s trip mechanisms were in place. The selling was relentless and historic. By the time the trading ended Wall Street had shed 22.61%. In one session. That compares with the 3-4% declines this week, and an 11% drop in 1929.

Naturally I assumed life was ending. A new depression was coming. This was unparalleled. It was different this time.

The next day hundreds of thousands of readers were treated to pictures of bread lines, hollow-eyed vagrant children on flatbed trucks and an army of unemployed men. My words matched. They were alarmist, shallow, unhelpful and reeked of inexperience and lack of judgment.

I regret it still.

Needless to say, central banks moved in, flooded the economy with liquidity and markets rebounded. A few days later stocks jumped by more than 10% in a day – the 7th-best gain on record. Within a couple of months, investors had shrugged it all off.

So, when the dot-com bubble burst and tech stocks lost 80% of their value in 1999, I remembered that. It was on my mind during the Y2K panic. Also in the terrible days and market collapse surrounding Nine Eleven. Same with the 2008-9 housing-induced meltdown and financial plunge. Plus the US debt ceiling crisis in 2011. And now.

Through every one of these never-happened-before moments many folks got scared, sold things shedding value, retreated to cash and did so on the advice of panicked, inexperienced, unwise and incorrect voices. They missed the good days that followed, crystallizing losses and robbed themselves of wealth. Today it’s far worse. Social media has removed the professional, sober-second-thought media filter, allowing a torrent of conjecture, fear-mongering and falsehoods to wash over us all.

In every instance of market mayhem in my life, certain things have been true. People who act out of emotion get whacked. Those who ignore the end-of-days gloom around them come out okay. Those who dive in when other flee make out like bandits.

Each time the system has self-corrected. Central banks get activist and adjust rates. Governments unleash capital. Stimulus packages and incentives emerge. Nobody wants a 1930s rerun, and with every crisis, scare, panic and pandemic, new ways are found to prevent one.

I’ve also learned markets are far more extreme than the rest of society. They swing from irrational exuberance to group suicide. The highs are too high. The lows too low. The pendulum always swings back. As one Wall Street smartie said on Friday: “With markets on the brink of correction territory, panic-selling, mis-pricing of high quality equities, and lower entry points, this could turn out to be one of the key buying opportunities in the last 10 years.”

As stated here yesterday, the bottom is unknown but we might be only half way there. A top-to-trough rout of 20% seems quite possible, and history shows us a wave of buying will follow. The world is still growing. US unemployment’s the lowest in 50 years. Great companies abound. Technology is improving life. Central banks will act. The immense disruption caused by this virus so far – and to come – is not erasing demand or corporate revenue, but pushing it into the future.

These things I did not understand clearly three decades ago. Now, yes.

Let’s end with Josh. He’s got a burning question for you:

I’ve been practicing what you preach for a few years now and have passing on the good work of BDL (balance, diversity and liquidity). I found my person and we’re getting married on July 1, 2020. My parents just gave us $10 000 for the wedding. Should I buy up the S&P 500 once it drops 20%. or just leave it in cash until the wedding? Thanks for everything you do.

Did I just hear a bell?


The real deal

Nancy’s in a state. “Hope you pick a scared-looking puppy for this post,” she says.  “Feels very appropriate.”

No, we’re gonna use a cat.

However, she caught my attention with a pretty good MSU: “My husband initially forced me to read your blog (out loud to him) with plenty of sighs and eye rolls on my end but now I look forward to our nightly ritual, I swear!”

Okay, N. You’re in. Now what’s this anxiety thing?

I’m hoping you can quell my anxiety right now by helping us not lose all of our money. We make 160k combined and have close to 900k invested in rrsps and tfsas. Our investments are relatively balanced but we do own pretty large portions in our “winning” stocks (Tesla, Shopify, Apple and Facebook) the rest are in ETFs. As the stock market is currently taking a gargantuan tumble, what should we do? Should we take our money out now and buy again at the bottom? Should we stay put hoping this sneaky virus goes away and things return to normal? Should we buy a house with our money – seems like that market isn’t being effected by the virus… Please help otherwise I’m afraid we’ll be right where we started years ago with nothing left in our savings!

Yes, fear is the strongest of emotions. It trumps greed, sex or the way you feel when someone says ‘hereditary chiefs.’ This week has been ugly for investors as the virus spreads, traders take risk off the table and the stock market lurches into a correction (down 10%). As described here two days ago, money has cascaded from equities into bonds, driving prices up and yields down. Oil’s been whacked as have most commodities. And look at volatility – wow, an eruption. Similar to 2011.

Now contemplate the comment made by blog dog Bill about the stock market’s slide from record highs. This is what I mean about the effect of fear:

Garth doesn’t get it. This virus is the real deal. Tens of millions will die. The global economy will be completely wrecked. I think we break the 2008 lows. Ultimately, your investment portfolio right now is going to be less of a concern than how much food and supplies you have stocked up on. It’s going to be a shock when this hits people and they will panic when they realize how unprepared they are. Grocery store shelves will get cleared out one day soon. It’s happening.

Covid-19 cases are fading in China and growing outside. The crap on social media and the icy fingers gripping the hearts of some of wussy doubters down in the steerage section are predictable. People never change. They think half the world will get this and countless millions die. But in Wuhan, a city of 11 million, there were (at most) 70,000 cases – .6% of folks. Deaths there have run at 0.02% of the population at large.

So, Nancy, there may be empty store shelves in the coming weeks but you probably won’t get the virus and you surely will not die. Nor is this what Mr. Market has been worried about, either. Instead the issue is a drop in global economic output caused by the public health response, leading to diminished corporate profits. If you think that sounds like a temporary hit, well, bingo. Exactly the case. And in that reality there is much optimism.

Investors hate uncertainty, so until a timetable emerges, the selling will continue. We’re maybe half-way there. The correction of 10% that has occurred could turn into a 20% drop – the technical definition of a bear market (the same thing happened at the end of 2018, when people on this blog utterly capitulated. Then markets gained 30%.).

What’s likely to occur at that point (or sooner)? Central bank action, for one. The market now believes rates will drop two or three times by the end of the year, lopping 60-70 basis points off existing levels. That will inject a huge amount of liquidity into the economy, and because this is a global issue there will be a global response. Central banks will likely move in a coordinated fashion, while governments also scramble to restore equilibrium. Look at Hong Kong. This week they handed spending cash to every adult.

Meanwhile the reasons markets went up two months ago are still in place. “Even with the retracement… we’re still at cycle highs,” says a Wall Street manager. “But once we get through this very large uncertainty, markets will have an enormous coordinated tailwind of fiscal and monetary stimulus to help those equity valuations in 2021.”

Expect the Bank of Canada to trim its key rate in April, given the virus, the FN blockades, the oil sands disaster and the plopping price of oil. (There should be a cut next week, the CD Howe Institute argued on Thursday.) All that is pushing Canada towards a temporary recession, and pushing the bank to act. Which it will.

So the virus may be a new challenge, but the ultimate pattern should follow that of past shocks – from the GFC to Y2K to 9-11. It may come with more emotion, and more disruption in daily lives if subways and schools close for a while. And the sight of malls full of people in surgical masks is chilling.

But in terms of your portfolio, Nancy, sit tight. Never sell into a storm. The balanced and diversified part will be fine. The individual stocks will be more at risk. Sounds like you failed to realize capital gains and move them into safer, broader assets. Remember that lesson for next time.

Yes, there’ll be one. We shall have exactly this conversation again. Count on it. Now go and load up on toilet paper before Bill hoards it all.

Letter from a Chinese blog dog…

Thursday, 8 pm ET. I just received the following letter from a regular reader working in China, who is living through the Covid-19 storm. You might find this of interest.

Writing you again as a Canadian investor working and living in China through the Coronavirus.  I’ve written you in the past, but I just thought I’d share with you a response to Bill who you featured a fearful comment from today on how the Coronavirus is going to destroy the worlds population and market.

Over here in China (where I’ve been living and working for over 2 years now), at least in my southern city near the Hong Kong border things are returning to normal. More and more shops are open.  People are out and about in parks and sidewalks.  People have returned to work – myself included.  Everyone still wears masks outside their house all day and we sign in to every location we visit via an app so potential outbreaks could be tracked quickly.  But there hasn’t been any new confirmed cases in this City of nearly 20 million in days.

As a daily reader of this blog for years now, who’s recently started a new job with a 30% salary increase, I’m excited to see this downturn and will be investing every cent I possibly can into this storm to take advantage of these sale prices!

Thanks again for all that you do!  You’ve helped this moister relate more to boomers financially, and looking at my portfolio, that’s a good thing.