Five months into 2022, we are off to one of the most challenging starts to a year in decades, and not just because of the weather! April saw the Nasdaq record its’ worst monthly performance since 2008. The IT sector is down 30% year to date, and the broader-based markets had their most significant monthly drop since Covid hit. It’s not just the depth of the decline in asset prices that is so stressful; it is also the fact that there is no real safe place to hide. Bond markets are down as well, and if the year were to close out now, it would mark the first year since 1970 when global stocks and bonds were simultaneously negative. You can hide in cash, but even with interest rates higher than they were a year ago, you will lose purchasing power relative to inflation.
The same interrelated problems we have been discussing for the last couple of quarters are the pain points. Supply chain issues continue to plague markets as the global economy struggles to emerge from the pandemic. China is still locking down cities as they continue to try and eradicate COVID rather than accept its inevitability being endemic. China is almost 20% of the world GDP, but it punches well above that regarding its importance to global supply chains. President Xi’s “zero-Covid” policy has resulted in upwards of 373 million people being confined to their homes so far this year. That is more than the entire population of the US and Canada combined. Throw in the war with Ukraine and the resultant increased pressure on energy and food prices, and it is no surprise inflation continues to surge. The government’s response to inflation is a tightening monetary policy that is just getting started.
That is a lot to digest! I don’t bring all this up to depress you. There is something therapeutic about acknowledging that things aren’t good! I was in Toronto last week for an advisory council meeting. First business travel since Covid for me. Almost a bit of PTSD going into a live, maskless conference environment again! There was a group of about 25 of us—top advisors from all across the country. We were in meetings for a couple of days, and of course, everybody had half an eye on their phones, keeping track of the market during the sessions. Day 1 ended in cheering as the markets had a last-minute rally right before the bell. The presenter at the time probably felt pretty good about his talk, thinking he had elicited the excitement. I felt bad for the presenter on Day 2 though, as that ended with a collective “f***” that reverberated through the room when the markets crashed and ended up with one of their worst days in years! It doesn’t change anything, but it is cathartic knowing that everyone feels the same pain. Misery loves company!
The silver lining to all this, from my standpoint, is it makes it very easy to give advice. Buy as much as you can right now. When you have market days where you see a clean energy company, a pharmaceutical company, and an IT giant all drop 10% on one day with no news, that tells you that the market is not trading on fundamentals. Fear and uncertainty are behind the wheel right now. The more “growth” oriented a company is, the more it is punished as investors bend to the pressure to ‘derisk’ their portfolios.
Financial intelligence isn’t the ability to read a balance sheet or understand financial statements. Financial intelligence is the ability to step back and recognize when markets aren’t making sense. We don’t know when we will hit peak inflation; we don’t know when the war with Ukraine will end; we don’t know how far monetary tightening will go; we don’t know when the global economy will entirely free itself of Covid.
We do know that all these things will eventually end. We know that the market and individual companies will ultimately return to fundamentals. We know that we are seeing valuations of companies back where they were 2-3 years ago even though their earnings are three or four times what they were back then. We know that we have record lows in unemployment and 15-year highs in savings. We know there is still a tremendous amount of pent-up demand from the average Covid repressed consumer.
We also know what we need our investments to do. Portfolios that need income continue to kick out income. We have buckets set aside to provide stability for revenue needs in moments like these.
For everything else, we need our portfolios to be worth more later in the future. Three months, six months, or even one-year numbers are meaningless. We need the money years from now, not presently.
According to Empirical Research, the relative valuation of growth stocks is now at the lowest level since 1980. Facebook (now Meta Platforms) is trading at a lower multiple than Philip Morris. In what world would you bet on cigarettes over social media and technology in the long run? Financial intelligence dictates that we want to buy as much as possible when good companies disconnect from their fundamentals if the goal is for the portfolio to be worth more in the future. Markets have vastly overswung in discounting growth, and that fear-based discount is not a threat but an opportunity.
We went to my son and daughter-in-law’s convocation a couple of weeks ago. Four hours of watching students and professors filing in and out of chairs is not exactly a good time, but it was meaningful. It filled me with nostalgia for when my wife and I were in that phase of life. Life moves in phases, and there is excitement in getting to know and challenge yourself with each new stage, but also a bit of wistfulness/regret in knowing you can’t go backward. I’m pretty good at living in the present, but the convocation was a stark reminder that my youth is gone and not coming back! Some things get better with age, other things not so much. When I was younger, I used to work out to improve my performance as an athlete and look good at the beach with my shirt off. Now I work out so that I am capable of putting my socks on without help and have a hope of finding a shirt that will fit me correctly. I accept this stage of life but can’t help but be a bit envious of the passing of my youth!
The great thing about markets is that they don’t work in phases; they work in cycles. You get periods where markets are great, but it is important not to get overly confident or complacent when times are good because there is always something coming around the corner. It is equally important to remember not to succumb to fear or panic in downturns. Things will cycle back up again. Investing is not like fighting a valiant but ultimately futile battle against aging. You do get second chances with markets. If you missed out on the tech bubble bursting or the crash of 2008, or the COVID market collapse, it’s ok. There is going to be another crash that rolls around. Buying on dips is like having a time machine that allows us to go back and purchase companies today at valuations we last saw years ago. Corrections and crashes are like the fountain of youth for investors!
I had a few takeaways from the conference in Toronto. The first was the confirmation that there is tremendous pent-up demand to spend coming into the economy as things reopen. The conference rooms at the hotel were full, it was difficult finding a cab anywhere, and every person there had travel plans for the upcoming year. I don’t even want to talk about how big the bar and restaurant tabs were for the group of us. It felt like everyone had just turned 19 again for the first time! I somehow ended up in a club in downtown Toronto at 2 am on a Wednesday night. We were the oldest people in there by a couple of decades, which is about how long it has been since I was last in a club!
There are legitimate fears of recession. But with people repressed for so long, coupled with the fact that the average person coming out of Covid is both better off financially and worse off mentally, you will see a lot of money go into the economy in all sorts of ways. I am wary of being wrong on this, but the doom and gloom prognosis of the current primary media narrative seems unduly pessimistic.
Despite the hundreds of years’ worth of collective experience in the room from all the financial experts at the conference, there wasn’t a single bit of advice I heard over the week that would help predict where markets are going in the next couple of months. There is no magic ball or technical indicator that can tell us when a market is going to bottom or top. The more knowledgeable the investor, the more they realize the futility of trying to time markets. The best bit of advice I got came from Jack Armstrong. Jack is the Toronto Raptors announcer, and I initially didn’t get why he was on the agenda as a speaker at a financial conference. But he was engaging and funny and summarized his most important life lessons, which were, if not profound, well-timed. He said that resiliency and mental toughness were the keys to a happy life. Those “margaritas on a beach at sunset” moments are precious but unrealistic expectations in life. You will always be just emerging from a crisis, in the middle of a crisis, or about to get whacked by a new problem. You can’t avoid them, so your ability to manage a crisis is directly tied to happiness and success. Pretty good advice when it comes to your investments too!
I hope to check in with as many of you as possible over the next month to review your portfolio and discuss how we can take advantage of market opportunities. Feel free to click on a time that works for you here- https://calendly.com/jlow-financial-review/30-45-minutes or reach out directly if you want to book a portfolio review soon.
Jeremy
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