2 out of 3 Ain’t Good Enough

We continue to experience heightened volatility in the market as evidenced by these current headlines:

  • The Dow Jones had its biggest point drop in history, Monday (Vox March 16, 2020).
  • The stock market crash of 2020 began on March 9, 2020. The Dow fell a record 2,013.76 points to 23,851.02. It was followed by two more record-setting point drops on March 12 and March 16. The stock market crash included the three worst point drops in U.S. history, (the balance March 20, 2020).
  • The Dow Jones recorded its best day since 1933 as it gained 11.4%.
  • The Dow is having its best week since 1930. (CNN March 27, 2020)
  • This is why the Dow surged 2,100 points on ‘Turnaround Tuesday’ (CNN March 24, 2020).
  • Coronavirus economic updates: 3.28 million unemployment filings shatter 1982 record of 695,000 (ABC News March 26, 2020).

The question everyone wants answered is have we hit a bottom in the markets, and should we be buying? Our opinion is to stay cautiously pessimistic. This approach means that we do remain invested as we don’t believe in going fully to cash and selling out of the market. However, we have maintained a healthy cash position in portfolios throughout this crisis and still hold a healthy position.

We initially raised cash in early February, starting to sell stocks at the height of the market as we were concerned about the spread of COVID-19 globally. This proved to be a great decision as we were able to protect portfolios and hold cash through the major downturn.

We bought certain securities during particularly difficult days in the markets, taking advantage of the lower valuations that presented themselves. Great companies could be bought at relatively attractive prices.

During the rapid and impressive rebound in the market that we experienced in the week of March 23rd, 2020, we took advantage of the rally to again sell positions and again increase our cash positions. We did this as we felt that there remains risk in the market at this point.

The Federal Reserve is doing its job of ensuring there is enough liquidity in the economy. It has lowered the federal fund rate to nearly zero. It has restarted quantitative easing and buying of bonds and set up several emergency programs intended to ensure that banks continue lending to companies, and municipal and state governments. Jerome Powell, the Chair of the Federal Reserve said that they would provide essentially unlimited lending to support the economy.

The $2 trillion stimulus package from Washington, the largest in US history, is also necessary to save the economy from a longer and deeper recession. That stimulus package is largely being put in place to ensure that companies survive the sudden economic stop caused by COVID-19. It also wants to ensure that individuals remain employed as much as possible, or at least have access to basic necessities through financial support during this period of forced social distancing.

Economically speaking, the US is doing the right thing to protect the economy. It is on the back of these measures that stocks recently soared.

However, on CNBC this week, the former Chair of the Federal Reserve, Ben Bernanke spoke. His message was clear. He agrees with the above measures and feels they are appropriate given the circumstance. He did, however, caution that without an effective Public Health Policy, these measures will struggle to work effectively.

“Nothing is going to work – the Fed is not going help, fiscal policy is not going to help – if we don’t get the public health right, if we don’t solve the problem of the virus, of the infection, so making sure that the risk has declined sufficiently before we put people back in the line of fire,” Bernanke said.

At this point, it is our view that 2 of the 3 necessary ingredients are in place. The third is not at this time. Social distancing policies are too slow to be enacted in the US and they are struggling to stay ahead of COVID-19. It is also our view that they will need to be much stricter than they have been and more unified as a country in their approach (as opposed to tackling this through a state-by-state approach).

At this time, we are maintaining a defensive position until we feel more comfortable that the US will have a handle on this pandemic. The next few weeks will be very difficult for our neighbours south of the border.

While we feel that, generally, Canada has done a better job than the US, the situation will undoubtedly also create much stress to our medical system. We know these are stressful times for our courageous physicians and healthcare workers on the front line.

While we don’t know the timeline, we are confident that the US and the global economy will overcome this virus and that life will mostly return to normal. People will travel again, they will eat at restaurants, they will go out and socialise. During this period of volatility in the markets, there will be opportunities to purchase great companies at attractive prices, and we are ready to use the cash we have raised in portfolios in order to do that.

As always, we thank you for the trust you have placed in us to steward your portfolios. We continue to work hard on your behalf to ensure that we are managing your assets through these challenging times.

We welcome you to reach out to us to discuss how this impacts your personal portfolios as we remain just a phone call away.

The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.