Entries from December 2019 ↓

The decade

DOUG  By Guest Blogger Doug Rowat


Ten years ago, and one year after the financial crisis, I was wondering how much longer I’d have a job in the investment industry, Sidney Crosby had yet to score the Golden Goal at the Vancouver Olympics, Tom Brady had only (“only”) three Super Bowl rings, Donald Trump was becoming best known as the host of Celebrity Apprentice, Amazon was primarily an online bookseller and Jeff Bezos wasn’t half as rich (or jacked) as he is now, self-driving cars were only talked about by sci-fi nutjobs, everyone took taxis (“What the hell’s an Uber?”) and Taylor Swift was a huge pop star (fair, some things stay the same).

So, it’s been a decade of remarkable change and we’re now only a few days away from entering a new one. Given the industry where I, thankfully, still work, below are what I consider the 10 most important business stories from the past 10 years.

Don’t agree with my list? Come at me, bro.

10. The 2011 Japanese earthquake and tsunami. How does a natural disaster make the top business-story list? Because it was so devastating that it rocked global equity markets and crippled one of the world’s largest economies. Following the March 11, 2011 earthquake and tsunami, which caused an estimated US$150 billion in damage and killed roughly 20,000, Japanese markets fell nearly 19% in less than a week. We always show the below picture to new clients. It’s an impossible scene taken shortly after the disaster—a cruise ship ON TOP of an apartment building. It’s a reminder that market outcomes are unknowable and that attempting to time them short-term is pointless.

Japanese tsunami aftermath: expect the unexpected

Source: Google Images

9. The race to a trillion. Throughout the decade it was a tight race between Amazon and Apple to become the first publicly listed company to achieve a market valuation of US$1 trillion. Finally, in mid-2018 Apple won, boosted over the milestone by a stellar quarterly earnings report. Apple didn’t technically launch its iPhone this decade, but it was certainly the enduring and otherworldly success of this smartphone that allowed it to finally break the trillion-dollar threshold. As this decade comes to a close, Apple’s market cap sits at almost US$1.3 trillion.

8. US bond yields and bond returns continued to fall. This decade couldn’t buck the multi-decade trend of declining bond returns. Once again, US bond returns slid while US equities had another monstrous decade. Still think you’re going to fund your retirement by holding only bonds?

Another decade, another drop in bond returns

Source: Bloomberg, Turner Investments

7. Brexit. Typically, portfolio managers discount political turmoil, especially when it’s taking place overseas. However, the Brexit debacle has created so much uncertainty that it’s had a profoundly negative effect on UK and European equity markets, causing both to massively underperform US and global benchmarks since the original June 2016 Brexit referendum. Naturally, any properly diversified global portfolio still needs UK and European equity exposure, but timing the recovery for these markets is nearly impossible. In the end, you simply have to have a sense of humour. The best Brexit joke I’ve so far come across? Q: How did the Brexit chicken cross the road? A: I never said there was a road. Or a chicken.

6. The current US economic expansion became the longest in history. The financial crisis was almost certainly the worst economic disaster that we’ll see in our lifetime, but we’ll likely never see a US expansionary period like the one we’re in right now either. The US economy has grown for 126 months and counting, setting the new duration record earlier this year (see chart). Before you conclude that the good times must therefore soon end, consider Australia—it hasn’t had a recession in almost 30 years. Duration alone is never evidence of what will come next.

The current US economic expansion (126 months) is the longest in history

Source: NBER

5. The underperformance of Canadian equities. Remember when the Canadian oil sands were all the rage? So much for that. Over the past decade, most oil-price benchmarks went nowhere. The main North American oil price benchmark, WTI, actually declined 23%. As a result, our S&P/TSX Energy Index managed only a 0.5% annualized total-return over the past 10 years. It was, essentially, a lost decade for oil & gas investors. Canadian equities overall still managed a decent 6.9% annualized total-return (thank you Canadian banks), but this paled in comparison to global equities, which averaged 10.1% annually. For Canadian investors, the 2010s perfectly illustrated the dangers of overconcentration and home-country bias.

4. China. In the 2010s, it became impossible to ignore the most populous and fastest growing country in the world. China began the decade by overtaking Japan as the world’s second largest economy and then book-ended the decade by becoming embroiled in a massive—and still unresolved—trade war with the US. Throw into the mix violent and much-longer-than-expected pro-democracy protests in Hong Kong and China is likely to continue to be a focus for investors in the 2020s. But should you eliminate exposure to China heading into the new decade? Definitely not. With 1.4 billion people and an economy that’s rapidly urbanizing, it’s inevitable that China will soon become the world’s largest economy.

3. The European sovereign debt crisis. I’ve been to Greece. It’s beautiful. But how could a country so tiny become the focal point of a global financial crisis? However, it did. And ‘contagion’ became the market’s new favourite buzzword in 2011. Greece’s failure to repay its debt, which many felt would spread to other countries throughout Europe, combined with its upwardly spiraling bond yields, sparked a crisis that caused global equity markets to sharply decline in 2011. Could a debt crisis reemerge in the coming decade? Possibly, but the current Greece 10-year bond yield, which amazingly was as high as 37% in 2012, is saying that we’re out of the woods for now:

Greece 10-year bond yield – past decade

Source: Bloomberg, Turner Investments

2. The US Federal Reserve (finally) raised interest rates. It was a long wait—nearly 10 years—but the Fed finally increased its benchmark overnight rate in late 2015. It was the first of nine rate increases. While a nine-hike tightening cycle seems impressive, it took the overnight rate to only 2.50%—significantly lower than the previous four tightening cycles, which each brought the overnight rate north of 5%. To paraphrase Bruce Springsteen: high interest rates are going boys and they ain’t coming back.

One of these Fed tightening cycles is not like the others

Source: Bloomberg, Turner Investments. A rate-hike cycle is defined as a period of multiple increases in the Federal Funds benchmark overnight rate. Any rate cut ends the cycle. Market returns not annualized. Total return.

1. Donald Trump. He forced all the experts, myself included, to re-evaluate everything they thought they knew about economic and foreign policy. Do you remember when the S&P 500 traded negative for nine consecutive days just prior to his election in November 2016? Remember how the market sold off sharply overnight once the final results were in? How wrong we all were. Since Trump’s victory, the S&P 500 has returned 16.3% annually on a total-return basis, easily eclipsing the 12.3% annual total-return of the previous years this decade. And, despite dire predictions to the contrary, volatility has been more than 30% lower versus the long-term average as well. Who would have thought? Donald Trump, Mr. Tranquility.

Trump, the calming influence: CBOE Volatility Index: long-term average (white line) vs Trump presidency average (green)

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


Let the dogs out

Friday was the last day to sell a security, have it settle and be able to claim a loss again gains. If you weren’t aware losses could be deducted from profits in order to reduce taxes, well, now you do. If fact, it gets even better…

Losses (usually from dog stocks your idiot BIL told you were ‘sure things’) can be carried back three years and applied against taxable wins – so taxes paid in 2017 or 2016 could be reclaimed. As well, capital losses in Canada can be carried forward indefinitely, then used to offset past or future capital gains. Sweet.

This ability to creatively use losses is a powerful argument for dumping any of the crap investments you’ve been nursing along for years. I’m constantly running into people (usually men) who can’t bear to sell something for less than they paid – so they hang on to the pooches for an agonizing period of time, during which there’s at least a 50% chance things will get worse. It’s a guy thing. If you eventually break even it’s like the bad decision never happened. Virginal once again!

Of course, it’s been hard to find losing securities in 2019. Unless it was one of the weed stocks, like Aurora. That bow-wow was sitting at close to $14 in March, now finishing the year at $2.60 – a plunge of 80%. The entire cannabis sector has been a boneyard of failed expectations, more evidence buying individual stocks is a hedonistic gamble and speculating on new and unproven companies can be financial suicide. The looming vaping crisis and the destructive potential of edibles could bring a lot more heartache to those who bought into Justin’s failed social experiment.

Despite the weed debacle, Bay Street ends 2019 on its own high. The TSX has gained 20% (plus dividends), and sits 25% above where it was a year ago – during the Santa Slaughter. That’s when my suspender-snapping, Porsche-driving, bowtied, omniscient, stones-of-steel portfolio manager colleagues moved to increase their weighting in stuff like a low-vol Canadian equity ETF that’s steadily gained all year, now ahead 22%. It’s a timeless lesson. In a storm you buy, never sell.

So here we are staring into 2020. US markets have soared about 30% despite trade wars, Boeing and impeachment. The coming year will bring a US presidential election (markets think Trump will take it), probably more trade agreements, plus enhanced global growth, inflation and even higher interest rates. All that’s good, given the fact it’s already the longest period of economic expansion in modern history. You will remember that 12 months ago the headlines were all doomy as bond yields inverted and everyone hunkered down for a recession.

It didn’t come. Now with robust corporate profits, the lowest US jobless rate in history, an easing of the China trade tensions and Brexit coming to a conclusion, things look kinda peachy. So stay invested.

But wait. Isn’t it a lot more likely, with markets so high, we could have a correction if a surprise comes along?

Yes it is. After gains of 20% or 30% investors could be tempted to take risk off the table if they see things heading south, even temporarily. If Trump loses in November, if the China deal blows up, if the Senate waffles on the impeachment trial, if Hong Kong is invaded or a string of climate-related disasters threaten global growth, expect consequences.

How much? How long?

A few pullbacks (a drop of 5%) should be absolutely expected. A correction or two (declines of 10%) are entirely possible. Remember that two-thirds of the time a drop of that size does not foreshadow the coming of a bear market (a plop of 20% or more) and even if a bear arrives, it can depart fast (as happened exactly a year ago). The most important thing to remember is to park your emotions and resist the temptation to bail when the numbers turn red. Of course, you should also have a balanced approach to investing. No equity-only portfolio. No individual stocks. Forty per cent fixed-income assets (bonds, preferreds). Diversification (use ETFs, have some REITs, not too much maple etc). And be tax-smart, putting boring bonds in an RRSP,  growthy stuff in your TFSA and dividend-producers in the non-reg account).

So declines are a fact of life. But remember 70% of the time markets advance. Thus never be too fearful, nor too greedy. If you end up with a cur of a security – the result of an emotional mistake – dump it. Unlike ex-spouses they’re good for something beyond regret.