Hope everyone had a great long weekend! With my kids all still in school of some sort and my wife a teacher, the Labour Day Weekend always officially denotes the end of summer for me and a significant swing in my work to play ratio as everyone in the family shifts back into full work or school mode. This year even my dog Mikki is in on the act as she is currently in training to be the love interest in the new “Turner and Hooch” TV series that is premiering sometime soon. She was “head hunted” for the role as the series films locally and wanted a white German shepherd for the part. My sister and I have two dogs from the same litter and the breeder we got them from recommended us. Not sure how well that is going to go as while she is a very smart dog and seems pretty amenable to most of the training she has been getting, by growing up in a soccer family Mikki has learned to be protective of her balls and she refuses to willingly give them up to the trainer no matter how many hot dogs she is offered! At least for now though I am taking great joy in pointing out to my kids that Mikki is worth more to us than they are!
I always have a bit of a feeling of gloom as I start out my first week back into my “regular” routine in September. No more holidays booked until Christmas, golf clubs and kayaks go back into storage, and shorts and t shirt wearing weather is fast disappearing. It probably doesn’t help that historically September is the worst month for stock market returns and October is notorious for having the worst crashes. No real economic reason for this to hold true going forward and to paraphrase Mark Twain, the other bad months for speculating in stocks are “January, February, March, April , May, June…”, market downturns really shouldn’t be correlated to a season, but you can understand me feeling a bit anxious as we head into fall!
First couple of days leading into September have lent further credence that we are going to be in for another volatile third quarter this year. I don’t really know why it would happen now versus earlier as we actually are in a place where most leading economic indicators are as good as they have been since April and we are now in established uptrends pointing to a much better corporate earnings trajectory going forward. The tone from the global economic data started to improve in May and by July most of the information was landing in a much better position than had been expected. With this trend continuing into the end of August, it is not surprising to see some big numbers being entered for third quarter GDP growth expectations by economists. For example, Canadian GDP is now anticipated to rise by 35% and the U.S. numbers are expected to jump by 21%. Most of the world’s leading indicators argue that the budding economic recovery is not over. This has encouraged the economics community to not only pencil in solid Q3 growth rates but to extend that view well into 2021. As it stands, world GDP growth is expected to advance by more than 5% in the coming year. While pockets of froth are evident, we do not see the widespread greed that usually marks the ending stages of a bull market as there is a pretty healthy dose of skepticism hanging over markets right now.
The biggest knock against equity indexes at this juncture is the elevated valuation levels. I talked last month about the huge disconnect between the economy and stocks and that is being born out statistically as markets across the board are carrying valuation multiples at the higher end of their historic ranges. Still a bit misleading when looking at broad based indexes as Tech continues to be the major growth theme and is skewing indices across the board. The market cap of the top 5 names within the S&P 500 (Apple, Microsoft, Amazon, Facebook, and Google) is equivalent to the bottom 386 names all added together. Same trend in Canada. If we take the spread of the top performing (Info Tech: +81.1%) and the worst performing (Health Care: -36.7%) sectors of the TSX so far this year, it is +118%. Looking back in time, we find that this is the widest spread since 1999 during the Tech bubble. These high elevations in Tech come from the belief that future prospective earnings will ultimately justify current prices. Valuations are not effective timing tools but elevated multiples mean that performance can turn ugly very quickly if the underlying fundamentals take an unexpected turn for the worse.
I know what you are thinking, thanks for the information Jeremy but what does that actually mean to me? The short answer is not much. Your portfolios are built on a disciplined and detailed, but ultimately pretty simple investment philosophy. I like DaVinci’s maxim that “simplicity is the ultimate sophistication” rather than just being thought of as simple minded! As the steward of your savings I need to know what your objective is and what your time frame is and then we build out a properly balanced portfolio that will meet your objectives. We want to be owners, not simply investors. In other words, we want to invest in ideas and sectors and companies that have durability and are sustainable. We don’t want to just partner with a company this week in hopes to sell it next week for profit, we want to own companies that are looking to build something in the long term. Any speculation we do is meaningful speculation in ideas or businesses that we believe matter, not simply buying the latest trend in hopes that they could go up in value. We want to invest with the knowledge that it is actually easier to make money than keep it. The biggest risks to portfolios are not markets or taxes or inflation, they are imprudence, hubris, error. We invest in ideas we have strong conviction in but also with the humility to understand that we will make mistakes and it is more important that the mistakes we do make don’t blow up our portfolios than it is to pick stocks that triple or quadruple in value.
When we have portfolios built on a solid philosophy and anchored by disciplined buying and selling triggers, we don’t need or even want to deviate from that plan much based on where the short term winds are blowing. We will be opportunistic when it makes sense to do so – if someone offers to pay you to train your dog for a tv role, you take it! But we want to focus the majority of our resources and time on purposefully collecting assets that meet our investment criteria that we want to own for the long term. We will be cautious where it is warranted. Sometimes we want to take profits and sock them away for a rainy day, but ultimately we have our sights set on our destination and want to avoid being pulled off course by the many distractions that are sure to arise. Nothing in life stays stagnant, and change can sneak up on you, so it is important to monitor and review the plan regularly to ensure it is still fulfilling its purpose.
My wife and I spent our last week of summer up at Whistler with friends. We started going to Whistler with these same friends 25 years ago and have been going annually with them ever since. Originally it was just the four of us, and then we went through a period of 20 years or so with our two families together with all our kids, and now we have come back full circle to just us four again. It has always been a very active vacation filled with hiking, biking and swimming and we usually think of it as a jump start on getting back on track with our fitness after a summer of lazing around. We got back yesterday, and as I was unpacking, I heard a loud expletive from my wife. My wife never swears, so I rushed over fearing the worst only to find her standing on the scale. She was up 5lbs from our “active” holiday! Somehow our hiking, biking and swimming has morphed into golfing (with carts), shopping, hot tub time and making sure we get into our favourite restaurants. Life changes as you age! Same as investing. You may think you are in the same place in terms of risk level and portfolio objectives, but it is important to adapt the plan as your life moves along. Life is fluid and can either change abruptly for some reason, or it can stealthily sneak up on you until one day you realize that you are not the same person you were 10 or 20 years ago! Either way, the monitoring and reviewing part of managing your finances shouldn’t be neglected.
Being up in Whistler you can’t help but be in awe of the mountains and surrounding peaks. Think of investing as a journey along a winding mountain trail to a peak destination. The path is long and you have to pace yourself according to your fitness level and your time frame. You don’t want to be caught in the mountains unprepared in the dark. You could really fall off the path or get lost at any point in the journey, but it will hurt more in some places over others, especially as you get closer to the top. Where the path is smooth and easy we want to make better time, but we don’t want to just stop or get off that path in difficult stretches because traversing the path is really the only way we can get to our objective/destination. We have to pay attention to mitigating risk in particularly treacherous parts of the path. At some points in our journey it may behoove us to put on a safety rope and helmet! Also, important to remember that the closer we get to the summit the more we need to take care not to make a major mistake.
Bottom line is that while it looks like the economic and corporate earnings trajectory will continue to improve into next year, I want to position portfolios for growth, but with a healthy dose of risk mitigation. Elevated stock prices, COVID concerns and a US election are going to add even more volatility to what is already likely to be a bumpy time of year. We will rebalance a bit to help smooth out the ride, but keep the big picture in mind, put your seatbelt on and look to stay the course with regards to your long-term goals! Stay positive, stay safe, stay disciplined!
Jeremy
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