Coronavirus and Market Volatility

Hi,
 
The last five days (and few weeks) in the market has been characterized by the same panic that has taken over our nation’s supply of toilet paper with panic taking over any rational thought. The financial markets are in a “shoot first, ask questions later” mentality causing a flight to safety by any means necessary. Over this week, we have seen a completely irrational market with daily moves averaging +/- 7.25% per day. This week alone we have seen the largest and most liquid stock market in the world, the S&P 500, decline by 9.5% in one day and rebound 9.28% the next day, this is not normal activity for what is considered one of the most mature markets in the world. We have seen liquidity in the 17 Trillion dollar US Treasury market become that of a thinly traded TSX Venture exchange small cap mining stock with yields on the US 10 Year Bond whipsawing from 1.2% to 0.31% and back to 0.78% all within one week. Over the weekend, we saw the Federal Reserve in the United States cut interest rates by 1% and launch QE5 to help stabilize the financial markets with their remaining monetary policy measures.
 
This is not a normal market, but one that is highly emotion and is trading on fear and panic. The only thing rationale about the market is the state of panic investors are in as we have not seen an pandemic on this scale since the Spanish Flu of 1918, as we are fearing an invisible threat which doesn’t show any signs until days later. The best parallel to the threat of a virus in the natural world is a forest fire in that a forest fire will continue to spread and grow uncontrolled as long as it has fuel to burn, with a virus that fuel is human interaction which is why the only way to combat the virus is to flatten its growth curve with social distancing. As a result, we may be looking at a few weeks of having to bunker down and wait for this storm to pass.
 
Sell-offs in a moment of panic are often violent, often coined with the phrase that the markets move “stairs on the way up, elevator on the way down”. During the 1987 crisis, the financial markets took approximately 12 months to regain their losses and hit new highs. Even during the Great Depression during 1928 and the Great Financial Crisis in 2008, the markets eventually recovered and continued to move to all new highs. This current panic that we are in is neither of these two previous events and more of a one time shock to our system. It may take a few weeks or months to pass through the country and a few more quarters to ripple through the economy like an aftershock from an earthquake.

One of the lessons that I learnt from my father and grand-father during the various times of market panic was the importance of having a balanced portfolio with investment grade fixed income which works as defence in times of volatility and to own a diversified portfolio of blue-chip stocks that are have strong free cash flow and dividend cash flow that are able to withstand any decrease in economic activity. I remember that during Black Monday, my grandfather, at age 88, sitting next to me in his mahogany chair, which still resides in our office, using the crash as an opportunity to teach important lessons that were passed down to him from my great-grandfather from the previous 60 years including the Great Depression of 1928 and two World Wars. Again in 2008, when Lehman Brother collapsed and it looked like the banking system was in jeopardy, my dad, who was in his early 80s at the time, was helping to provide his wisdom that he learnt over his career. During these moments, I learnt the importance of staying rational during times of panic, to focus on the fundamentals of what you own, tune out the daily noise and financial fearmongering, to create a shopping list of high quality companies that have gone on sale, and to stay invested for the long-term.
 
Over this last week, we have seen high quality companies be thrown out with the rest of the TSX as international investors sold the entire TSX market due to the new price war between Russia and Saudi Arabia and their view of Canada as an oil economy. While oil makes up a large percentage of the economy, it is has created value in companies such as the Canadian Banks. I remember in 2008, when the market was crashing, my father talking to our team, and stating that while today may not be the time to buy, to look long and hard at these backbones of our economy such as BMO, TD, RBC and Bell Canada reaching yields of 6+% as these were excellent companies that were paying high dividends. At this time, that is what we are thinking as well, that these market sell offs only happen once every decade, and this is one of those chances. Today may not be the day but over the course of the next few months, we will have an excellent opportunity to add to high quality companies and create a base for the next bull market.
 
As a long term investor, we are blessed with having a time horizon that is significantly longer than the market participants causing the volatility. Eventually the financial markets will return to a period of rationality causing growth to return. The companies that you own in your portfolio have a proven track record of being able to navigate slowdowns in the economy, growing their revenues and returning excess cash to their shareholders. While we are in an area of rough water at the moment, eventually the storm will pass, but are working to be proactive during this period volatility to protect capital and create a base for future growth.
 
Over this last week, we have begun to see a coordination of global governments realizing what they need to do to combat the disease. This has included quarantines and a series of fiscal policy measures to support economies. Once the virus passes, the economy will restart and with the extraordinary level of stimulus, we will see hopefully a quick rise in economic confidence and customer spending. Our job is to help guide all of us through these turbulent waters and weather the storm that is approaching. Our team is actively working to be proactive during this time and find opportunities to add to high quality companies.
 
If you that have any questions or want to chat, please reach out to our team. Also, please feel free to share this with anyone who might appreciate this during this period of volatility as we are happy to talk to any friends or family who need a steady hand to talk to.
 
Debbie, Chris, Mark and Rosemary