Since my last article was written, the economic situation has deteriorated significantly. Our stock markets have been in freefall with the U.S. market recording its fastest ever 30 per cent decline. I use U.S. market history rather than Canadian because the data is readily available and the United States is the largest, most diversified market representing almost 45 per cent of the world’s market cap, compared to Canada’s three per cent.
It took 22 trading days for the S&P 500 to decline in excess of 30 per cent. The previous record was set in 1934 at 23 days. Third place was in 1931 with 24 days and fourth place goes to 1929 when it took a much longer 31-day period. The difference between 22, 23 or 24 days is rather academic, but the speed and magnitude were astounding. Given the era where previous records resided, I certainly hope the current record does not portend the kind of market action we might see in the next three to four years.
During the Great Depression, the market was down 89.2 per cent excluding dividends. However, when dividends are included, the decade from 2000 to 2009 was actually worse than the decade from 1930 to 1939.
From Feb. 19 to March 23, the S&P 500 lost 33.9 per cent while the TSX fared worse with a 37.4 per cent drawdown. Both markets have rallied as I am writing, but in no way does that signal the worst is over. It might be, but we could also have a long way to go before the market truly turns around.
Nobody knows how this will play out. There are lots of projections and predictions but the reality is we are in uncharted waters. Never have the authorities tried to shut down so many aspects of the economy around the world. There are lots of prognosticators saying they predicted this bear market, but many had predicted a similar collapse every year since the financial crisis and it is important to remember that a broken clock is also right twice a day.
We can’t manage or predict the market. Nobody regularly picks a market top or bottom, and trying to do this is a fool’s game. Playing coulda, woulda, shoulda is also a non-productive pursuit, and while there is a “reverse” in our vehicles, none exists in life. In times of crisis most things are outside of our control, but we do control our own behavior and reactions.
Whether you are putting money into the market to build assets or collapsing accounts to live on during retirement, it is best to do so at a steady, gradual pace, especially when markets are fluctuating five to 10 per cent per day. That way you’re never buying everything at the top or selling everything at the bottom. The market survived the First World War, the Great Depression and the Second World War within a span of 30 years. It will survive this.
Let’s say you wish to invest $100,000 over the next year, add about $8,000 per month. Identify the strong companies you wish to buy and perhaps invest $4,000 in two companies each month. There is nothing wrong with buying (or selling) a small stake in a company now and more later. It doesn’t have to be all or nothing. Similarly, if you are taking money out it’s best to do so at a gradual pace, picking the lower quality companies you want to sell first, then moving to the better ones later. However, it is important to do what is within one’s comfort zone as an investor.
The stock market provides significantly superior long-term results partly because of its unpredictability. If the market was consistent it would provide returns similar to other consistent return investments like GICs. Because its returns are unpredictable short term, it must provide superior long-term results to attract investors. My preference is for superior returns and to accept volatility to achieve them.
Expectations, but with a high level of uncertainty:
1. The economic crisis will last much longer than the health crisis.
2. Despite government action to support individuals and businesses, significant bankruptcies are unavoidable.
3. This crisis may finally end residential real estate speculation in Toronto and Vancouver.
4. Companies should repatriate some production to North America, so supply chains are less concentrated in China. Reliability of supply should become as important as cost.
5. Many public companies will be forced to cut dividends to save cash, and others that normally increase dividends annually will not be able to do so for a couple of years.
6. The markets will be choppy for an extended period.
With greater certainty:
7. Those who keep their wits and avoid panic will experience excellent opportunities to build.