Market View

Quarter 1, 2020

What WorkedWhat Didn't
Gold StocksEnergy Stocks
CashU.S. Bank Stocks
Government BondsCanadian Dollar

Equity Markets% Change (in Cdn$)
S&P/TSX Composite-20.9%
S&P 500-11.8%
MSCI/EAFE-15.2%
MSCI/EM-16.1%
TSX Energy-37.2%
TSX Financials-21.1%

Bond Markets% Change (in Cdn$)
FTSE Canada Universe Bond IndexFTSE Bond Index Change

April 2020

This Time It Really Is Different

We would like to start by saying we hope that you and your extended families are all keeping healthy during these very troubling and unprecedented times. Nothing is more valuable than your health.

One of the most overused terms in the investment world is, “It’s different this time”. Whenever there has been an event that has caused stock markets to go down substantially, and those of us who have been in the business a long time compare it to previous bear markets in an effort to predict how things will work out, the ‘it’s different this time’ predictions always come out. Invariably, though, we look at how stocks and bonds and the economy did after previous bear markets and use that as a guide for how the current bear market and subsequent recovery may look like; and invest accordingly.

This, however, is no ordinary bear market. This one wasn’t caused by a financial crisis, it wasn’t caused by overvaluation of financial assets (although that may have exacerbated the market decline), it wasn’t caused by terrorism or protectionism. This bear market was caused by a Pandemic. A worldwide Pandemic with, so far, no treatment nor cure nor vaccine and no end date in sight. The Pandemic has created a worldwide recession, almost instantly, where suddenly, large parts of the population are ordered to stay home and a large part of the economy is idled, bringing in little or no income or revenue to people or businesses. In other words, this time it really is different.

Over the 100 years of our combined experience we have had many positive influences. Norman in particular had a mentor named Ted Rabin, who taught him an important rule of investing. It was called ‘The Rule of the Wrong Amount”. It is a rule that can only be viewed in hindsight and can never be broken. It’s a very simple rule. You always owned too much of what you didn’t want to own and never enough of what you should have owned.

Going into the financial crisis, beginning in late 2007, we saw things happening in the U.S. financial system that we didn’t like, so we sold a lot of our stocks and held an unusually large percentage of our clients’ assets in bonds and cash. That helped protect our clients from the worst of that crisis. Stock markets bottomed on March 9, 2009 and we were very happy to have that cash to use buying great companies at what turned out to be excellent prices, as markets began a decade long recovery.

We bring up the rule of the wrong amount because we, and just about everyone else, did not see the speed and severity of the COVID-19 crisis until it came crashing down upon us. The rule of the wrong amount had you, our clients, owning, in perfect 20-20 hindsight, too many stocks and too little in bonds and cash, even though we did own hefty amounts of both. You couldn’t have owned too much. Cash was King in 2008 (not enough), cash was scorned in 2009 (too much) and, along with government bonds, cash has become King again so far in 2020.

Now that we are in the thick of the crisis, we must ask: Where do we go from here? First, we must all acknowledge that nobody, and we mean nobody, knows how this will end. All we can do is use our collective wisdoms to come up with possible scenarios and then invest accordingly.

The first thing to know is that we have not panicked. We are long-term investors and know that in the long-term (and yes, sometimes it can take a very long time), stock markets go up. That has kept us from selling large numbers of our stocks after they have already moved substantially lower.

The second thing is that in investing, you must always look forward, not behind. Therefore, we have been on the hunt for companies that will weather the storm better than most and will benefit the earliest from when the Pandemic eases (note that we did not say end as, if you wait for that, the stock market is likely to leave you behind). Also, and most important, we want to make sure that what we own survives the Pandemic and severe recession. No major company has yet declared bankruptcy, but, in every recession, some company will surprise investors and fail. Therefore, it is important to own quality, meaning companies with solid balance sheets.

To that end, we have sold some companies from our clients’ portfolios that we decided didn’t have the quality we deemed necessary at this time and there may be more of that to come. Much will hinge on how this downturn works out and how long it lasts. We have also initiated ½ positions in a few high-quality companies that we believe will do well as economies begin to recover. Nobody knows when that will occur, and we do not pretend that we have bought these stocks at their bottoms. Nobody knows where that will be. We will be making additional ½ position purchases over the next number of weeks and even months and eventually buying the other ½ in the companies we feel the best about. Baby steps. We want to defy the rule of the wrong amount as much as possible. Near the end of April, we will be sending you another update on how we see things and what we are doing in anticipation and in response because, it really is different this time.

Please everyone, stay well and stay home!

Fred Burton    Anish Chopra    Rhonda Dalley   Norman Levine

Other Markets

Fixed Income  March 2019  December 2019
Cdn 91 day T-Bills 0.23% 1.67%
U.S. 91 day T-Bills 0.09% 1.52%
Cdn 10 year Bond 0.75% 1.64%
U.S. 10 year Bond 0.70% 1.92%
Commodities (in U.S.$)  March 2020  December 2019
Oil 20.48 61.06
Natural Gas 1.64 2.19
Gold 1596.60 1523.10
Currency  March 2020 December 2019
Cdn/USD 1.4068 1.3018
Cdn/Eur 1.5520  1.4566