Entries from February 2020 ↓

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?