August 2020 Newsletter

Allen’s Analysis for August 2020

Mid-Summer Market Update

The S&P 500 has recovered its losses this year and is now in the green. However, the breadth of this recovery is concerning, given that when you look at the S&P 500 on an equal weighted basis, more than 50% of the index is still down under 10%.  A handful of stocks such as Amazon, Microsoft, Netflix, Tesla, Apple, Google and Facebook, along with the rise of the day traders, have contributed to this dispersion in terms of performance. These seven stocks collectively trade at a record 41x’s PE and 7x’s sales and make up about 25% of the S&P in terms of index weighting.  Some market pundits believe a major bubble may be forming in some of these stocks. Meanwhile, the Dow and TSX are still in negative territory, albeit far less than the depths of the March panic.
 
In our Legacy portfolios, we never experienced anything close to the 35% plus drop that the markets endured during the March sell-off. Further, we have been able to recover from our relatively modest paper losses to now being positive year-to-date. Not only did we avoid a 35% plus downside during the sell-off, we also choose not to get caught up in what may indeed be a “bubble” currently forming in some sectors and stocks.  Our conservative portfolios are designed to focus on absolute return while making preservation of capital a main tenet of our investment philosophy. As Benjamin Graham (Warren Buffett’s pedagogue) once wisely said, “the essence of investment management is the management of risks, not the management of returns.”   

For those who don’t mind the wild gyrations of the portfolio, our humble aggressive growth strategy is up 35% year-to-date.  Keep in mind, this same mandate was down close to 25% during the March sell-off.  The portfolio is invested in a collage of mostly small caps with exposure to sectors such as gold, AI, biotech, and energy.
 
Besides the market risks identified by our friends at Manulife (listed in the following section), we believe the upcoming election in the US is another risk that the market has not given enough thought too. Factors such as earnings and central bank policy matter, particularly in the long run.  However, in the short term, the election in the United States could have a material impact on markets depending on who wins Congress and the White House.


Q3 Market Risks

With the first half of 2020 behind us, many are trying to predict what the second half will look like.  Below are the market risks, levels and outlooks for Q3 2020.

  • Economy (risk to the upside): The US economy and others around the world reopen in a gradual pace with COVID containment conditions in place.  Economic contraction is sharp but short.  PMIs start to recover and stabilize.  US unemployment peaks and trends downward.

  • Valuation (risk to the downside): Earnings recoveries tend to see PE contraction, yet low inflation and interest rates support a higher PE multiple than average (via higher equity risk premium). Trading S&P500 index 12M PE ratio falls one to two points through to the end of 2021 to 20-21x earnings.

  • Earnings (near term risk to the downside/18-month risk to the upside): 2020 S&P 500 index earnings fall 20% to $132/share, then recover to 2019 levels through 2021 back to $160-165 with risk to the upside.

  • Yield curve (steepens): the Federal Reserve and Bank of Canada maintain their accommodative policy through 2021. Short end of the yield curve remains near zero.  Longer end of the curve steepens as the recovery takes hold.

  • Credit (neutral risk): with the Fed’s support, credit spreads compress to long-term averages. Returns are predominantly yield driven as bonds come under pressure from a rising yield environment.  High yield is favoured over investment grade.

  • Oil prices (risk to the upside): oil prices trend with an upward bias as inventories falls, production remains low and demand improves. West Texas Intermediate trends between US$35-5/bbl.

  • Currency CADUSD (risk to the upside): the Canadian dollar remains tied to oil prices. US dollar weakens on monetary inflation.  CADUSD trends higher with a range of US$0.73-0.77 over the next 12 months.

Source: Manulife Investment Management


Charts of Interest

Largest S&P 500 % Weight

Nasdaq vs. Russell 2000

Meatpackers are trying to replace human meat cutters with robot butchers.

Another haven? Cold, hard cash.
The number of $100 bills in circulation outnumbered $1 bills for the first time on record in 2017. The gap has widened each year since, according to data from the Federal Reserve. Over the past decade, $100 bills in circulation have more than doubled while singles are up by less than one third. Another possibility for rising demand for high-denomination bills: an expanding underground economy.

In the Basement
Government bond yields are at historically low levels.


Avoiding Emotional Investing: the Key to Long-Term Financial Success



Many financial market professionals and investors spend time trying to make sensational investment predictions. We humans are prone to our emotions and too often we want to buy when prices are strong-because we are feeling good- and at the same time not wanting to buy when prices are weak because we are feeling scared.

A successful long-term investment approach is having an active management strategy that takes the emotions out of investing. This strategy involves adding prudently, to good investments when investors are running scared in a general market sell-off  and not getting too greedy to take profits when an investment becomes overvalued or worse bubble like. 

Making this investment strategy work includes avoiding value traps while also recognizing when investors’ “fear of missing out,” is rampant.  History shows that dramatic sell-offs or bubble like blow offs are wonderful opportunities to ensure your nest egg will grow even if it doesn’t feel like it at the time.



Featured Team Member: Laura Furtado
  



With more than of 15 years of experience in the marketing and advertising industries, Laura provides creative insight into the client experience of the CADENCE FINANCIAL GROUP. Laura earned a Bachelor of Commerce and Business Administrative certificate from Ryerson University in Toronto; she was the top marketing student of her graduating year.

After graduating university and back-packing across Europe, she entered the advertising world, providing client service for high-profile North American brands. After deciding that agency life was not for her, she ventured into entrepreneurship. She created and ran a membership community for female entrepreneurs and ambitious women, building one of the largest in Toronto. Through this, she planned and hosted a variety of events, conferences and programs, including financial literary seminars for women across Canada and USA. She received various awards that highlighted her efforts, including being titled one of Canada’s Top Young Entrepreneurs. She franchised and then sold her business before moving to North Vancouver in 2016.

Laura has a great appetite for travel, having visited almost 55 countries. To fuel this passion, she has created an international volunteer program that organizes trips to educate and empower women abroad; her efforts have spanned across Belize, Nepal, Ghana, Peru and India.

Laura is also passionate about dance, having been a professional international dancer for 15+ years. In her spare time, she enjoys spending time with her young daughter, Annika and husband, Travis.


How We Are Looking to Better Serve You


Over the past few months, we have looked at ways to improve our communication to better serve you.  We are proud to highlight two initiatives that we have introduced including:

  • Informative monthly newsletters that includes charts of interest and other insightful financial resources and
  • A new website, including a modern look and feel and a Market Resources section that is updated weekly

As we continue to enhance our client experience, stay tuned for more details about developments on:

  • Technology to allow online bookings for client market updates and portfolio reviews and our
  • September’s market update conference call

We would like to hear your thoughts on how we can better communicate in this COVID world as we explore new technology and processes.  You can share your feedback by emailing us.

 

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