This is a tremendous time for investment – the birth of a new market cycle and “bull market”. We keep a steady eye on seventeen different areas to reveal where we are in the business-cycle (see graph below). For a few years these indicated mid- to later-cycle but thankfully we stayed patient with this and enjoyed enormous gains in 2019. Eventually every bull will die, giving way to the “bear”, but equally every bear will give up its lead to the stronger bull. This year Covid-19 became the catalyst that killed the old bull. So here today we can review the birth and death of market cycles, and how the new bull market can accelerate our wealth and personal financial rewards.
(NB: some of today’s ideas may seem too simple for some readers yet complex to others. Perhaps skip to the closing “summary” and then return here for the full letter.)
BEARS AND BULLS WE’VE KNOWN BEFORE.
Most can recall the “tech-meltdown” which devastated stock markets from year 2000 to 2002. Technology and anything with “.com” in its name had rocketed skyward with or without earnings, absent dividends or even a business model, with fraudulent reporting sealing the fate of many. Tech stocks dropped 80-100% as wider markets fell 50-65%. Survivors included banking, real estate, infrastructure, metals — especially conventional firms using new-tech to reduce costs and raise earnings). March 2003 the bear turned over and a new bull was born. “Value” equities had proven safest, and still helped move the bull market forward, roughly doubling values by 2007.
We all can recall the 2008-2009 global financial meltdown. Commodities had peaked mid-2007. Mid-2008 onwards, banks and other financial firms dropped 65-100%. Other market sectors fell in sympathy, broadly losing 55% or more. Gratefully, our key “value” equities (dividend income, global real estate and infrastructure) recovered quickly and reached new heights in eighteen to twenty months. Wider markets struggled six full years to break even by 2014.
Since a newborn bull in 2009 there were challenging moments – 2011, 2015, and twice in 2018. Those bear-threats came and went, so the bull market continued to early 2020. Whenever threats loom or worries arise try to remember Nick Murray’s golden gem: it’s not timing the markets but time in the markets which pays our rewards. The reverse would have cost money in 2018 and lost out on the 15-22% gains of 2019.
BULLS BEAT THE BEARS.
Your eyes are fine but the picture is fuzzy when pasted into wordpress. Ask me to email or bring you an original copy. Here it shows 65 years as bull markets have gained over 130% on average during bull markets averaging 54 months. Bear markets compared with 27% downswings averaging 9 months. Bulls beat bears. It’s history, it’s math, it’s the logic of economic growth since the dawn of time and especially over the past 200 years.
2020 RISKS AND STRATEGIES.
2020 opened with a list of risks and strengths favouring further growth due to low interest rates, central bank asset purchases, and strong employment. Absent a calamity, markets could rise several more seasons but we were taking precautions, increasing fixed-income, keeping high-yield income, and adding to our high-conviction “conservative-growth”. This reduced risk if markets would go south and sustained high yield in any event.
Covid-19 at first seemed likely to pass without major impact: daily news from Japan and China seemed hopeful. 90% of possible pandemics have no effect on investments. By March as covid reached into Iran, Italy, and so on, we entered the fastest bear market in history, down 35% in a month. Any moment it could have turned better, but every day the virus spread deeper. Government response turned this into the fastest (partial) recovery in history. Given the speed, depth, and global response of program supports and monetary easing, we believe this bear will soon be ready for a long sleep, while a new Bull will accelerate our growth over the years ahead.
MARKET CYCLE … WHERE ARE WE TODAY?
This graph also appears fuzzy when pasted into wordpress — ask me for an original, but also here let me explain what it says. Courtesy of RBC-GAM we see seventeen elements of the economy and how they indicate where we stand among six seasons of any economic cycle. Never do all factors line up in the same column but we see where the combined weight of all factors will put us. Since 2009 we’ve moved through all six: Start of cycle, Early, Mid, Late, End of cycle, and Recession.
For a few years we were shifting to-and-fro between Mid, Late, and End of cycle. Covid-19 punctuated that, putting us clearly in recession. Today these factors show 39% to recession, 44% to Start of a new cycle. We’re going forwards. Covid can pause the accent but we’re still going forward. Research puts 85% odds of having multiple vaccines by next summer. Therapeutics are saving more lives today even without a vaccine. Investment markets start surging 6 months or so before an economy sees the light. So I say, despite doom and woe in the news media (it boosts advertising!) … a new bull is born and the new cycle will again be prosperous.
STRATEGIC THEMES NOW.
Themes we have been discussing this past year and more recently remain especially important, to fine-tune and guide our investments over the next few years and decade.
- Interest rates near-zero will remain low much longer. Central banks continue buying to support bond markets. If interest rates were to rise, covid-era debt would hurt governments, corporations, and households everywhere. Every lever will be used to keep rates low for a long extended period.
- Inflation will target a range instead of a fixed number. In 2018 the Federal Reserve found it utterly poisonous when they raised rates to cap 2% inflation – causing 20% market collapses twice that year. Favouring an “average 2% inflation” range over longer periods will avoid hasty decisions and such painful results.
- Global “income mandates” remain vital despite the lagged recovery in banks, real estate and infrastructure. In normal times, dividends average near 2% globally (or 4% in Europe). Our “income mandates” aim nearer 4-5% yield, paying more yet with less risk. For 2020 this yield has been nearer 4-7%, rewarding us for patience. As vaccines arise (85% positive forecast by mid-2021) and therapeutics show ever-improving results, “value/income” assets will prove highly rewarding.
- Cash deposits and bonds will pay less-than-inflation except where we use unique strategies across the whole credit spectrum. An equal weight of 10- and 30-year bonds currently pays just 1% … with risk of loss if held long term. Textbook strategies from years ago will sadly fail today’s investors, increasing risk of exhausting savings and outliving one’s money. By contrast, our “Life Income Plus” supports higher income, lower risk, to sustain goals and financial health for life.
- “Glamour-growth” stocks (famously called FAANGS and BATs) will eventually pass the baton to deeper-value and conservative-growth. They rise 50% or 300% on the thrill of innovation but they can also collapse on weak or zero earnings, also from legislation against monopolistic behaviour, not to mention fast-changing sentiment. Recall Nortel, Enron, Burntsand, and countless others of the 1990s: twenty years haven’t recouped the losses among those “tech-darlings”.
- “Conservative-growth” is entirely different than fads and glamour. Here we have vital innovation combined with responsible management, environmental and social sustainability, expanding market reach, fiscal prudence, modest debt, accelerating earnings … all this across a wide variety of industries and sectors. These are the “high conviction” assets I’ve mentioned in recent years. Ask me further how we fit this to your investment allocations and your certified financial plan.
- “Value” will regain the podium and wear the gold-medal as it has done through most of history. Recall my story of Jim in 1920 who said to his wife, don’t ever sell those stocks. His wife asked, and he described their holdings in certain banks, real estate, railroads, and utilities which would build value and increase their income-yield long after he was gone. 1929 was a grisly bear but that was temporary; Jim’s plan kept paying higher dividends, doubling and tripling value over the years ahead. That’s what “value” assets will do. Now as a final point today consider the following . . .
- Norman Rothery PhD CFA has gathered others’ research for an August 18th article comparing results of Glamour/Growth investing compared to Value over the past two centuries. Three periods reflect different ways of keeping records yet all three showed near-identical results. Glamour/growth outpaced value five times in periods around 1841, 1862, 1904, 1932, and from 2010 to today. But overall, “value” outperformed “growth” by 3.3% annually in every period and also for the whole two centuries. Not surprising then: (1) “value” is vital to long term growth and is absolutely essential to preserving income, and (2) “growth” can set a trend longer than expected but must inevitably yield to “value” … especially when combined with high-conviction conservative-growth.
New Bull Market is Born — Summary.
We are currently moving from recession into the birth of a new economic cycle and bull market. This heralds prosperous times ahead. Investments in deeper-value, higher-income, will richly reward in seasons ahead. Glamour cannot keep rising while starving for actual earnings but beneath the surface we have superior, resilient, companies increasing their cash-flows, growing their markets, sporting healthy valuations which strengthen our portfolio design and our ultimate results. To discuss what this means to you personally and for your investment accounts let’s speak together directly.
Reach me with any questions, and connect us with a friend or family who needs help to ensure financial goals, lifelong comfort, and a rewarding retirement. Freely share this letter if you know someone who can benefit.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Certified Financial Planner, Certified Retirement Coach
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N… Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.