Portfolio management tips for troubled times
October is a typically volatile month for markets, and this year has been no exception. The main North American stock indexes were down for the month across the board. So were crude oil and gold. We heard media talking heads bringing out all the old saws about how markets “hate uncertainty,” or “it’s the U.S. election,” or “it’s Covid-19.” And while it’s true some or all of these things may have contributed to stock market volatility, no single item could be said to predominate. And then on the first trading day of November, a strange thing happened. Stock markets turned around and began rallying, and they continued rallying through this first week of November, producing strong gains (see the accompanying graph).
Investor sentiment was dampened through October by mixed economic data and continuing concerns over the impact of the second-wave spread of Covid-19 cases. Analysts look particularly at the effect that any resulting government restrictions might have on economic activity for the fourth quarter of the year. In Ontario, for instance, the government moved to impose modified Stage-2 restrictions around the Greater Toronto Area and in Ottawa, lifting them again in early November.
So while Canada’s August gross domestic product advanced 1.2% over July, continuing a trend of strong GDP recovery over the past three months, Statistics Canada’s flash estimate of 0.7% growth for September threw some cold water on expectations of continuing strong growth. The weaker than expected growth for September could be indicating contracting growth for October and November as Covid-19 resurges in the second wave and greater restrictions are again imposed.
In addition, there was (and still is) some uncertainty in the U.S. about the result of the presidential elections on Nov. 3. Historically, the result of presidential elections and any impact on subsequent economic activity, especially over four years, cannot be reliably predicted. This is largely because candidates’ promises and policies during a campaign must face congressional approval and may not in fact be fully implemented, if ever.
The impact of U.S. politics on Canadian markets is even more nebulous. While media feeds are choked with “news” about the U.S. elections, it’s always prudent to remember that Canada is not, in fact, the 51st U.S. state. Canada is a sovereign nation and has zero impact on the outcome of the U.S. election. By the same token, though, the U.S. is Canada’s largest trading partner, by far, and Canada will continue to be subject to the trade whims and wishes of whichever administration occupies the White House.
A change in leadership at the White House doesn’t mean that Canada’s trade relationship suddenly becomes all sweetness and light. It never has, and never will. It simply means the emphasis will change. For example, where President Trump renegotiated the North American Free Trade Agreement on terms more favourable to the U.S., and recently briefly imposed tariffs on Canadian aluminum, he approved the Keystone XL pipeline. A Biden administration may in fact reverse that, cancelling the pipeline (and other energy projects), but perhaps lifting tariffs on other products.
The crux of the matter is that no one knows, and it’s almost impossible to make an educated guess. That’s why elections are not considered key drivers of market activity, except perhaps in the very short term, where the daily noise of political announcements, claims, and counter-claims can briefly affect daily sentiment.
Of more lasting concern to investors and analysts is the corporate earnings outlook, which in turn hinges on any economic recovery. Governments everywhere have opened the fiscal fire hoses, increasing national debt to stratospheric levels and pushing the burden of repaying through massive tax increases down the road.
Central banks have also opened the liquidity valves, cutting interest rates to near zero, and indicating that they’ll stay there for as long as two years. Quantitative easing (central bank purchase of bonds) is also back in a big way.
The flood of money is having the desired effect in the U.S., as the economy recorded 33% growth in GDP in the third quarter as household spending led the way, spurred by fiscal stimulus (with more to come as Covid cases surge across the U.S.) and job creation.
Despite the roller coaster ride markets took us on through October, there are some bright spots, which bode well for the future. The U.S. technology majors – Amazon.com, Facebook, Apple, and Alphabet, reported quarterly earnings last month, pretty much blowing the doors off their previous revenue and earnings growth records.
Except for Apple, the tech majors posted double-digit growth in earnings for the quarter, coming in at a combined US$38.1 billion on combined revenue of US$220 billion. This is significant, and something our portfolio managers are watching closely, as these four technology majors comprise about 25% of the S&P 500 Composite Index, with market cap of about US$5.3 trillion.
In short, stock markets are experiencing typical seasonal volatility, goosed by short-term uncertainty about the outcome of the U.S. presidential election. If you’re tempted to anything with your portfolio other than pre-set defensive adjustments, I recommend you think twice. Many investors were whipsawed back in March when markets sank into correction territory, only to quickly recover losses and reach new highs in the following months. This past week was a repeat, and many novices and do-it-yourselfers were once again taken in by intense, short-term gyrations.
Instead of succumbing once again to panic, I counsel clients to follow my five basic principles of dealing with market volatility:
- Avoid market timing. No one can do this successfully with any consistency. You’ll only incur excess trading costs and dampen long-term returns.
- Don’t obsess about the business news. It changes by the minute, it’s stressful, and mostly inaccurate.
- Don’t follow the herd. Chances are, you’ll follow it right over the cliff.
- Have a plan…and stick to it. You’ve set your strategy to cope with situations just like this. Don’t abandon it now.
- Get the right advice. If in doubt, contact us with any questions or concerns you have about your portfolio.