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Here's Where We Are.....................So Far

Gunther Kruger - Mar 26, 2020
What does the world look like with extended social distancing taking place and the continued ups and downs of the market.

We want to reach out to our valued clients again to give you our current views on the things that are occurring around the globe but more importantly how they affect you.

As I write this the Dow Jones Average (as well as other major indices that are behaving similarly) is having it’s 3rd day of impressive gains. From a closing low of 18,534 on Monday markets have rebounded some 4,018 points or 21.7%. This market is still down 24% from it’s all time high and the speed with which this has happened is breathtaking.

We hope you will appreciate that we, like you, are reading all kinds of prognostications about the state of the world, the pandemic, the economy and the markets. Some border on the ridiculously pessimistic with the other end of the spectrum reaching the euphoric. We try to rely on long-time trusted sources who have stood us in good stead in the past and try to filter out the crazies (on either end of the spectrum).

No one has ever tried to shut down the global economy before, at least not on purpose. Government responses have been impressive with massive stimulus programs being introduced to shield individuals and businesses from the short term effects of this unprecedented effort to combat the pandemic. Massive amounts of liquidity have been infused into financial markets a la 2008/09 to shore these up and to protect millions from the effects of unemployment, at least in the short term. Even in Canada, our Prime Minister has pledged to provide $2,000 per month x 4 months for Canadians affected by this. Credit where credit is due, even we agree that this is correct and necessary during these difficult times.

There are also other favourable measures that are being considered that may affect you, such as changes to the minimum RRIF withdrawal calculations, all of which will be communicated to you as they become known to us.

The long and the short of it is, governments are working to preserve the global economy by whatever means necessary so that its functionality can be preserved i.e. it can largely remain intact so that it can resume a sharp trajectory upwards when the time is right. The good news is that one of our favorite economists, David Rosenberg, has said that the sheer magnitude of the response may be enough to flood the shock with enough cash and liquidity to mute the effects of this shutdown. That the strategy can and will work. This is a view we share in. Markets are rebounding because they too share in this view, for now.

What is unknowable at this time is how long this disruption will last due to the health issues we are faced with. Optimistic projections call for a partial resumption of normal activity by Easter, pessimistic projections longer. From a health perspective we know that that the Covid 19 numbers will get worse before they begin to peak and the trend reverses. The media is acting in their usual sensationalist fashion and the internet is abound with horror stories and graphic depressing images. This too will only get worse.

From our respective social distancing bunkers we continue to remain cool, calm and collected. From facts at our disposal we know that the world is facing 2 crisis’ at the same time. One health, the other economic and they are not unrelated. There can now be no doubt that the global economy has been thrust into a severe recession, almost overnight. We are also in a bear market. Markets thrive on visability and certainty, they abhor the kind of disjointed environment we find ourselves in. From past experiences we know that markets reach a panic low, they bounce for a host of reasons (short covering, pent up demand, good news, algorithmic trading, grasping at straws), typically they retrace up to 30-40% of their panic lows. Then some bad news sets in and markets resume their downward trajectory and “retest” those panic lows. If they hold, a bottom sets in. If not, they go lower. That’s what history tells us. It may well be that this time will be different since we are in uncharted territory, but as students of history we doubt it. Volatility will continue and happy days are clearly not here again just yet. On a positive note, markets are forward looking and will factor in a host of inputs, then at some point resume their long term upward trend. So you may find that markets will go up long before the conventional news would give anyone a reason to understand why they are doing so. This was the case on March 9, 2009. But there were many head fakes along the way (up and down) to that date too. Above all market bottoming and recovery is a process. Bear market rallies may be tradeable rallies but they are rarely investible rallies. As David Rosenberg often says, you want to rent the rallies – not own them.

Another phenomenon that we see in these volatile markets is the concept of “throwing out the baby with the bathwater”. Perfectly good companies are sold off for a variety of reasons (panic selling, margin calls, negative sentiment) when there is no valid reason for them to be trading at the prices they are. A Calgary favorite, and multi family landlord, Boardwalk Equities, once an $80.00 stock was trading at $16.00 on Monday. I suppose all of their 40,000 plus tenants across the country will vacate tomorrow (it closed at $20.87 today). Some perfectly great companies get temporarily priced for an Armageddon that never comes. You likely own some.

As we stated last week, we are all practicing social distancing and working from home. This seems to be the responsible thing to do. None of us are ill. We continue to man the phones, read our e-mails and reach out in a variety of ways. If you would like to talk to us we are here at the ready. Margaret wants everyone to know that she is available to answer any tax or other enquiries you may have and you can contact her via e-mail or phone. For us it’s another day at the bunker/office.

We hope you will find this useful. We don’t want to minimize things but nor do we want to be Chicken Littles, the media does that for us. Around here it’s Keep Calm and Sail On.

And above all, please stay Safe