Market View

Quarter 1, 2021

What Worked in Q1What Didn't in Q1
Energy StocksLong Bonds
Financial StocksGold Stocks
Value StocksTechnology Stocks
Equity MarketsFirst Quarter % Change (in Cdn$)
S&P/TSX Composite8.1%
S&P 5004.7%
MSCI/EAFE2.2%
MSCI/EM1.0%
TSX Energy20.3%
TSX Financials13.9%
Bond MarketsFirst Quarter % Change (in Cdn$)
FTSE Canada Universe Bond Index-5.0%

March 2021  

Revisiting the Old 60/40 Rule

It is just a snick over a year since stock markets around the world collapsed due to panic selling brought on by the onset of the Covid-19 pandemic. And, at the time of writing, it is just a snick less than a year ago since most stock markets bottomed and began their relentless return to where they were in early February of 2020 and on to new heights. For investors who only own stocks, it has been a real rollercoaster and for those who didn’t panic and sell their stocks in the spring, it has been quite a rewarding year since the end of March, first with growth stocks that benefitted from interest rates plunging to near zero percent and then from value/cyclical stocks that began to reflect the coming economic recovery and reopening of much of the economy that had been closed for the past year, and, most recently, both types of stocks going higher together.

However, if you are like most investors, and hold a mix of both stocks and bonds, your rollercoaster has been quite different as the value of the bonds you held soared as interest rates collapsed while your stocks were busy tanking. Then, once stocks started rising, so, soon after, did interest rates, and the value of your bonds began to decline.

That brings us to the end of the first quarter of 2021, where the value of the stocks you own have gone up quite a bit from their bottom and the value of the bonds you own have declined from their peaks, leaving your asset mix way out of whack, with too much in equities and too little in fixed income.

Interest rates declined for forty years, from 1981 to 2020, a run unprecedented in investment history. During that period of time, despite some volatile times in the stock market around the 1987 crash, the tech bubble and the U.S. housing crisis, holding approximately 60% of your assets in stocks and 40% in fixed income and cash has proven to be both conservative and profitable asset mix as stocks have appreciated hugely in the past forty years and the value of bonds appreciated as well during the relentless decline in interest rates. In the past few years, however, as yields on bonds declined to what were probably 1,000-year lows, we increased our clients’ weightings in stocks well beyond 60% and their weighting in fixed income and cash to well below 40%.

This takes us to the present time. With the large recovery in stocks over the past 12 months and the almost tripling of yields on 10-year bonds, many of your asset mixes were quite out of whack with too much in equities and too little in fixed income and cash. That works out well when stocks are running, but not so well should there be a meaningful correction. To remedy the situation, many of you will note that we reduced equity exposures in accounts where the weight in stocks had gotten meaningfully out of line. That was the easy part. The tougher part entailed what to do with the sale proceeds. Normally, we would put the proceeds into bonds. The problem is, we believe interest rates will be moving even higher than they are currently, and any bonds we buy at this time will quickly be trading at a loss as yields on bonds continue to rise.

What we have decided to do in the interim period, is to have higher levels of cash in many accounts and lower levels of bonds until we feel rates have finished going up, at least for the time being. While cash will earn very little, it also won’t go down in value, so we are working to protect your capital while we wait to deploy it in fixed income at what we believe will be a more appropriate time.

Recovery Relief

In our September quarter end commentary last year we postulated on what could change the market’s myopic focus on a handful of growth technology companies. We wondered: “What would happen if announcements were made to suggest a highly effective vaccine has been developed?” All of a sudden the investing landscape would shift. Interest rates would no longer be anchored and economic forecasts for the future would start to rise. Growth stocks would begin to lose their luster.” Indeed, in early November, Pfizer announced it had developed an effective vaccine for Covid-19 and the last six months from our September musings has seen the investing climate do an about-face.

We wrote that once an effective vaccine was announced, then “Cyclical stocks depending on economic growth and companies that have a more modest growth profile would come back into focus. Valuations would begin to matter again as would healthy corporate balance sheets and low debt levels.” And so here we are now, with the growthy technology stocks having taken a sabbatical for 6 months while the rest of the market got the attention we were waiting for.  Earnings expectations along with cyclical stocks and stocks that benefit from a reopening of the economy have risen as the recovery is no longer in doubt. Our portfolios were positioned for this. 

Although COVID-19 is still very much affecting our daily lives, the stock market has moved past this, interest rates have moved up and stocks correlated to economic growth have already priced in a significant recovery.  The next pressing investment question lies with the duration of the recovery and the ultimate level of interest rates as dictated by inflation fears.  Higher inflation from better economic growth (good) usually means interest rates will ultimately be rising.  This is not a problem until it is. There is, at some point, a higher level of interest rates that will cause growth to slow and the stock market to lose its strength.  Unfortunately, we are unlikely to get clarity on that timeline anytime soon.  Our guess is that the market will continue to climb, albeit more modestly than the past 12 months, and more stock sectors will contribute to the growth than in the prior few years. This will be a welcome change. Clues for the rate of economic market recovery going forward into 2022 (slower for sure than in 2021) and interest rate signals will be closely watched.

Other Markets

Fixed Income  March 2021  December 2020
Cdn 91 day T-Bills 0.10% 0.12%
U.S. 91 day T-Bills 0.02% 0.10%
Cdn 10 year Bond 1.53% 0.70%
U.S. 10 year Bond 1.74% 0.93%
Commodities (in U.S.$)  March 2021  December 2020
Oil 59.16 48.52
Natural Gas 2.61 2.54
Gold 1751.60 1895.10
Currency  March 2021 December 2020
Cdn/USD 1.2560 1.2719
Cdn/Eur 1.4726  1.5553