Bull or Bear Market?

What is going on in the markets right now?

Over the last month, the markets have gone through a significant rally. This is a good sign and good news. Everyone is feeling a lot better than they were a month ago. But what does this mean for investors? Is this the end of the 2020 Coronavirus market panic?

In my opinion, no, there is more to come. We haven't seen enough economic data, corporate earnings or even enough of a slowdown in the virus itself. It takes time for the economy to digest what has happened. But stay with me, as it's not all bad news.

My hope is that we kick this virus and the economy jumps right back into full gear. The best course of action though is to be realistic. That's unlikely to happen and there could be more negative news to come.

The economy was going full speed down the highway and ran into a brick wall. It will take time to clean up the mess, put the pieces back together and get things moving again.

My best advice for investors is to proceed with caution. Be defensive. This is a storm that you need to steer and navigate through carefully. You need to be both strategic and tactical to come out ahead.
This is not bad news though, because with every adversity there is an equal or greater opportunity. By navigating through the bear market appropriately, you will be in a much better position to capitalize on the bull market that will eventually follow.

Bull markets and bear markets are structurally very different. In bull markets, we get higher highs on a rally and higher lows when the market corrects.

In bear markets we get lower highs when the market rallies, and lower lows when the market corrects.

In my opinion, this is a recession and a bear market. Is this the end of the world? No. Are markets going to keep going down forever? No. The markets and economy will recover; I have no doubt about that.

Over the long run, I believe in equity markets. The strength of the global economy will prevail. This too shall pass.

One of the biggest mistakes that investors mistake is being overly optimistic in bear markets. The corollary to this being overly pessimistic in a bull markets. At times like this though it's better to be safe than sorry.

The bulls have been right for the last ten years and the bears have been wrong. Now the switch has been flipped.

But, there is a process for navigating through both good markets and bad markets. And this process is what I implement every day for my clients. There is a long term plan and strategy in place, and it is working.

You need to be both strategic and tactical to navigate through this. This is why you want to work with a discretionary portfolio manager with expertise in both fundamental and technical analysis. This is marrying both strategies and tactics. Fundamentals are important, but they are not the only thing that drives markets. Markets are driven by supply and demand. When there are more sellers and supply in the market, prices go down. When there are more buyers and demand in the market, prices go up.
So it's not only what you buy, it's when you buy it, and more importantly, when you sell it.

What is happening with energy prices? How could oil go negative? This is a problem of both supply and demand. People are not driving or flying right now. At the same time, there is a massive oversupply of oil both in Canada and globally. The future price of oil has actually gone negative. It costs more to store oil than investors and producers are able to sell it for.

If energy is an area of weakness in the markets, what are the areas of strength?

Technology, healthcare, communications, gold and to a lesser degree consumer staples and utilities.
As a tactical and technical portfolio manager, these are the areas I would focus on right now in this new world and economy.

Think of tech companies and areas like streaming services, communications, video games and cyber security and how they will benefit from what's going on over the long run. Both life and business are going to be centered around the home making technology increasingly important.

There is going to be significant investment in healthcare in the months and years to come. If a vaccine is found, it likely won't be until 2021. And the investment is not just for this pandemic, it's for future pandemics. Health and longevity are generally more important to people than their wealth.
Communications like 5G networks, telecommunications and social media are going to be increasingly important in a world where we need technology to connect us.

I am not saying jump in and invest in these areas today, but think about where the world is headed.
Central banks are printing money at unprecedented rates and interest rates are already at historic lows. This is needed to stimulate the economy. Actions have consequences though. This is very bullish for gold over the long run.

Consumer staples are benefiting from this as people need the basic necessities of life. But they are unlikely to be the positions that lead you off the bottom when the market and economy recover.
Utilities are holding up well as they are defensive and generally benefit from lower rates, but they are unlikely to be the names that lead the economy going forward. With low rates, over the long run, there is nowhere to go but up. This is not good for utilities.

So one way to be defensive in both your strategy and tactics is to focus on areas of strength rather than weakness.
 
Investing can be compared to a lot of things, but let's think of in comparison to a sport like hockey. Since we haven't seen live sports in a while, this might be a fun one.

In a bear market it's like you are on defence, killing a penalty. The other team is trying to score on you. You need a great goaltender, your best defencemen, and defensive minded forwards on the ice. You could score a shorthanded goal for sure, but it's risky and unlikely.

The primary objective is to protect and preserve capital. You need to keep the puck out of your own end first and foremost. Opportunities might present themselves but you need to be careful about jumping at them.

With time, we will get back to even strength, and eventually we will go on the power play, and that's when the real opportunity starts to present itself.
As always, if you questions or would to review your portfolio or wealth plan, feel free to contact my office and we are more than happy to book some time for you.
Stay Safe and Healthy.

Will