Why Have Markets Been So Strong Lately?

Millions of people remain unemployed. In some countries, new COVID-19 cases continue to rise at alarming rates. Some jurisdictions appear to have been too hasty with their re-openings and may need to reverse course by closing segments of their economies again. Most sources agree that it is highly unlikely that a vaccine will be available before next year.

When the outlook for the economy is so uncertain, why have markets been so strong?

Below is a link to an excellent article by Bill Miller, who is widely regarded as one of the most successful portfolio managers over the last 30 years. He is best known for the rare feat of beating the S&P 500 index for 15 consecutive years (1991-2005).

Click here to read the article

 

Key points that resonated with us include:

  • Corrections can, and will, happen but: “… stocks go up most of the time because the economy grows most of the time”
  • “The market’s behavior since the March 23rd bottom … has confounded most observers, from novice investors to the most experienced and savvy investors”
  • “Don’t fight the Fed (the US central bank, The Federal Reserve) … It took a while for the Fed to marshal enough firepower to end the financial crisis of 2008/09 but end it, it did. This time their response was immediate and overwhelming and stocks have responded accordingly”
  • “This is similar, in my opinion, to what happened around the bottom in 2009: People became risk and volatility phobic and most missed the great 10-year bull market”
  • “Stock prices typically lead the economy by 4 to 6 months so it is, or ought to be, no surprise they have been headed higher”

 

We worked diligently to have a process in place that allowed us to dodge the worst of this spring’s correction and enabled us to re-establish our positions for much of the rally that followed. It has been a challenging time, but we are quite happy with our current portfolio positions, both for today and for the coming months.

Please contact us if you have any questions.

What an Incredibly Unusual Time…

In just the last three months:

  • Approximately 40 million North Americans have lost their jobs
  • A price war between Saudi Arabia and Russia briefly caused negative oil prices
  • The worst pandemic in 100 years has infected over 7 million, and killed over 400,000 people
  • George Floyd’s disturbing murder sparked worldwide demonstrations, demanding greater racial and economic equality

How have the markets reacted? The markets experienced their sharpest downturn since the Great Depression, but a strong rally has returned them to about where they were at the beginning of 2020.

What did we do through this period? We focussed on protecting capital. In early March, as the reality of the world situation set in, we moved a significant portion of our model portfolios to cash. By late March, as central banks and governments were announcing massive stimulus programs, we began re-deploying that cash.

Markets hit bottom on March 23rd. As of that day, our equity pool was down about 13.1%, the S&P 500 was down 30.3%, and the S&P/TSX Composite was down 33.5% year-to-date. Most portfolios should now be close to where they were on January 1, 2020.

With so much bad news, how could markets rally? As we mentioned in our email and blog post in early March, the stock markets are not the economy. Markets look out 6-12 months and often bounce back sooner and more strongly than most investors expect.

So … smooth sailing for the markets from here? Unfortunately, that is unlikely. Enormous economic stimulus provides a floor under the markets, but there are still millions of unemployed workers. The spread of COVID-19 has slowed, yet as “re-opening” occurs we may see another rise in the number of confirmed cases. Additionally, protests in the US may be the new reality for quite a while.

What did we learn? It was gratifying to see the risk mitigation our PUT options provided through the downturn. We are confident we can layer additional options strategies to further reduce volatility.

We also learned that we can do more to protect the income portion of our models. As the market indices hit their lows, our Growth portfolios showed smaller losses than our Balanced portfolios because of their greater exposure to the PUT options in our Elevate equity pool. We have decided to create our own Income Pool so we can utilize the same protection provided by the equity options with our more conservative investments as well. We will provide more details as we get closer to launching the Elevate Income Pool.

We always follow world events closely. Today we are tracking them closer than ever. While we are optimistic about many of the positions in our portfolios, we remain ready to protect capital again when the time comes.

We hope you enjoy your summer in our new “social distancing” world. Stay safe and healthy!

 

Returns for the S&P/TSX Composite Index and S&P 500 Index are presented in their respective local currency and with reinvested dividends.

COVID-19: Why are Governments so Worried?

  • Schools and universities are closed – possibly until September
  • Some businesses are temporarily closing and many are asking employees to work from home
  • Italy, Spain and France are in lock down
  • Some cities and states in the US are in lock down
  • Governments are announcing large stimulus packages before people are really asking for them

What do they know that would cause such an extreme reaction from countries around the world?

Here is an excellent article that explains what things might look like if they don’t get ahead of this.

Our key takeaways are:

  • We can extrapolate what will happen in other places based on what happened in China and Italy
  • This virus is very contagious; but it can be managed if our health system is not overwhelmed
  • Social distancing works (it has been used effectively for over 100 years)
  • Our health care workers and hospitals will not be able to keep up unless we act now
  • The fatality rate will be lower if we reduce the cases our health system must deal with
  • We are really just trying to buy time until a vaccine is available
  • This threat of the virus will pass, but a vaccine probably won’t be available until next year

Be safe. Enjoy the sunshine. Hopefully this is just a distant memory a year from now.

COVID-19 and the Markets: Part II

What an unsettling couple of weeks …

The COVID-19 pandemic has drastically affected both our daily lives and our financial markets. Communities everywhere are dealing with the implications of the virus and doing their best to determine the healthiest way forward.

At the beginning of 2020, we were aware of the existence of COVID-19, but the infections were far away and the numbers were small. Even now, the number of people who have tested positive, and the number of deaths, remain small compared to a typical flu season. Yet we have learned via a few weeks of steady news flow that we are experiencing a rapidly escalating situation – one that may overwhelm our hospitals and our health care workers.

What does this mean for your investments?
How are we dealing with this changing situation?

As always, we are continuously monitoring our model portfolios. We believe the holdings in our portfolios will produce solid returns over 1-3 years – especially from today’s discounted prices. We are sticking with our process and not getting emotionally caught up in the markets. However, to protect capital, we have selectively sold some equities. Last Monday, one of our technical stops was triggered and we moved about 20% of our equity pool (QWealth Elevate Enhanced Global Equity Pool) from equities to bonds. Then last Thursday, the next level was triggered, and we moved another 14% to cash. Today the Pool holds over 35% in cash and bonds. Our PUT options protect another 20% of the Pool.We feel we are well positioned, especially versus our peers and versus the indices. Here are the Year-To-Date returns, to March 17, 2020, for the main equity indices and our portfolio models.

S&P/TSX Composite Index -25.2%
S&P 500 Index -21.4%
Elevate Balanced Model -8.2%
Elevate Balanced Growth Model -7.8%
Elevate Growth Model -7.2%

As you can see, our Growth Model has held up best. Why? It holds the largest percentage in our QWealth Elevate Enhanced Global Equity Pool, and this Pool is where we have the best tools available to manage risk. It is now in a more defensive position than many balanced funds.

Unless you have more money than you will ever need, your investments need an allocation to equities. Interest rates are close to zero and cash or bonds won’t help you build your savings.

We are doing our best to make the right decisions to:
a) help grow your assets; and
b) mitigate the risk where we can.

Wishing you and yours good health as always, but especially now.

Note: Returns for the S&P/TSX Composite Index and S&P 500 Index are presented in their respective local currency and with reinvested dividends.

COVID-19 and the Markets

To this point, 2020 has been an unsettling year: investment markets were initially up significantly, but COVID-19 fears over the past two or three weeks have caused them to give back those gains. We’re pleased that our risk management strategies — specifically our put options — have significantly reduced the impact of this volatility. However, as more information comes out about the coronavirus, there is growing concern that we may be in uncharted territory.

Ray Dalio (Bridgewater Assoc) identified three separate but related issues that help provide perspective:

  • The Virus: – The spread of COVID-19 is being treated as a global health crisis. How it is handled, and the resulting consequences, will vary by country. Headlines regarding the number of people infected and the number of deaths will continue. The uncertainties surrounding a new virus are frightening, and yet we may ultimately learn that this virus produces fewer infections and deaths than the flu does annually. A vaccine will be developed. The heightened concern about the virus has come, and it will go.
  • The Economic Impact: Countries are taking significant action to contain the virus. Those actions that curtail business activities (including social distancing) will certainly reduce revenues for many companies. The result will very likely be a short-term economic decline. Some industries like airlines and tourism will be hurt, and others will benefit from lower interest rates or cheaper oil. Some countries will likely be pushed into a recession. While deaths resulting from the virus are upsetting, history shows that most issues like this have resulted in bigger emotional reactions than sustained economic and market downturns.
  • The Markets: Central banks and governments have already begun to provide both monetary and fiscal stimulus. Ultimately, business activity will improve leading to a rebound for many companies. Of course, it is unclear whether that will take days, weeks or months.

With the drop in the markets, there are now many good companies with attractive yields and strong growth prospects. Normally we would take this opportunity to buy equities, but given the uncertainty in the immediate future, we feel the prudent move is to de-risk our model portfolios until the full economic impact is clearer. We have moved about 20 percent of our QW Elevate Enhanced Global Equity Pool to bonds.

Investing in good companies for the long run has historically provided investors with strong returns. Most of the time, we want the equity portion of our portfolios to be fully invested. But for now, we believe it’s a time to protect capital. We’ll continuously watch for the opportunity to move back to being more fully invested.

We will get past this. Forecasters usually underestimate human resilience and the bounce back tends to come earlier and more strongly than expected.

Elevate Wealth Management Ranks at the Top Again

Elevate Wealth Management ranks in the Top 11 Wealth Management & Financial Planning firms in Vancouver for the 4th year in a row!

It is very rewarding to have our hard work and success recognized!

Moving to Quintessence Wealth last year was another huge step forward for us. The technology and platforms at Quintessence Wealth are better than any we have seen and will help keep us at the leading edge of offerings for clients.

But we still want to keep getting better.

We know we can do more to help our clients. In the coming years, we look forward to rolling out new tools and resources which will help our clients grow their assets safely, protect their loved ones, and articulate and fulfill their goals and dreams.

Using Option Strategies to Reduce the Risk in Your Portfolio

One of the main reasons we moved to Quintessence Wealth was because they could provide better tools for managing risk in our client portfolios.

Bonds & GICs

  • Most bonds and GICs currently yield less than 2%
  • A 2% return on a $1 million portfolio is only $20,000 per year
  • As we have discussed in previous blog posts, worldwide monetary conditions are forcing savers to take on more equity exposure, because they will not be able to meet their life income goals with bonds and GICs alone.

Equity markets

  • Stocks have performed well over the long term, but they come with greater volatility
  • In the US, the S&P 500 adopted 500 stocks into their index in 1957 – since then, markets were up in 46 and down in 17 of the years
  • Since 1957, there have been only 4 years when the S&P 500 Index dropped more than 15% in a year: 1973, 1974, 2002 and 2008.
  • Despite the fluctuations year to year, the average annual return for the S&P 500 Index since 1957 has been about 8% per year.

Ascertaining your investment time frame, your need for growth, and your risk tolerance level helps us determine the appropriate breakdown of investments in your portfolio.

Thinking outside the box

We believe equity markets should move higher in the long run. There may be smaller corrections from time to time, but most of the time it still makes sense to be invested. However, some portfolio “insurance” also makes sense. “Options” can provide some of this insurance.

How do options help? There are endless different options strategies, but we are interested in those that reduce risk: those that aren’t needed if markets go up but increase in value if markets go down.

For example, we recently acquired options for one of QW Elevate Enhanced Equity Pool’s US investments – it allows us to be invested in the markets if they go up, but protects the first 10% if markets drop in the last three months of 2019.

  • If the S&P 500 drops 15%, the net result would be a drop of about 5%
  • If the S&P 500 drops 10%, the net result would be no loss

There is no perfect investment that gives all the upside and none of the downside, but we can try to tilt the odds in our favour with options.

Through our ongoing efforts – like introducing the QW Elevate Enhanced Equity Pool to our models this summer and adding a layer of options this fall – we hope you see how our new firm enables us to deliver enhanced portfolios with solid upside potential and greater peace of mind.

Introducing the Elevate Enhanced Equity Pool

One of the reasons we were attracted to our new firm – Quintessence Wealth – was the broader range of investment solutions offered. This month we are introducing a major enhancement to our portfolios: the Elevate Enhanced Equity Pool.

When we became Discretionary Portfolio Managers several years ago, we began by designing and testing various investment strategies. As we progressed, these became our model portfolios. These models have steadily evolved, and today – driven by each client’s risk and return objectives – each client account matches one of these models. This approach has provided significant improvement when compared with most industry offerings, but challenges still exist.

One challenge for clients with taxable (non-registered) accounts is that more transactions means more work to track the resulting gains and losses for tax reporting. A second is that smaller accounts can’t efficiently hold a large number of investments, so despite being managed to the same model, their returns did not match those of the larger accounts. A third is that our larger households often had to file a special US tax form to report on US investments held in their accounts.

Investment pools address these three issues. And more.

By transferring the current equity investments into our “Elevate Enhanced Equity Pool” (a separately coded investment held through Quintessence), we can continue to hold the same investments for our clients. Further advantages include:

  • Simplicity at tax time – the pool is seen as one single investment, so it produces only one tax slip
  • Available for all sizes of accounts – whether an account has $30,000 in equities or $1,000,000 in equities, an investor will have the same portfolio diversification and growth potential
  • No US tax forms are required – the pool is deemed to be Canadian (even if it holds $US investments)
  • Institutional pricing – we negotiated institutional pricing for several of the managed holdings in the pool, so the costs should be similar to or lower than what they currently are
  • Risk management tools – within the pool, we can overlay risk management strategies (for example, currency hedging). These strategies can further reduce downside market risk, but would not be available if we continued to manage the equities in individual accounts

We will continue to trade in “bulk” inside the pool, ensuring reduced costs and identical pricing on trades for all accounts whether large or small.

We look forward to discussing the concept further when we next meet!

Priorities For the Coming Months

With our transition to Quintessence Wealth nearly complete, our priorities for the coming months are focused on further customization of solutions and services that will immediately benefit you. Here are our current priorities:

Enhanced Custom Pools

  • The first pool we roll out will be focused on the equity portion of your portfolio
  • We will be using the same investment approach, with greater cost and return efficiencies
  • Instead of holding a dozen different equity positions, you would hold units of the pool that holds those positons
  • Tax filing would be much easier. Rather than having to track the gains/losses of multiple individual investments, you would simply include the T3 for the pool in your tax return
  • We will be increasing the number of stocks in the underlying mix to provide greater diversification
  • We plan to add a currency hedge overlay to reduce currency risk in the portfolios
  • Investing in equities makes sense in the long run, but at times it might be prudent to “lock in” some of the gains after your accounts have experienced decent growth. We will be exploring how best to use options strategies to reduce the impact of a correction when we have already achieved a strong gain for the year

Risk Tolerance Questionnaire

  • We have already explored your comfort level with risk and return in our previous discussions
  • This questionnaire will give one more input – a score – which will either confirm we have the right portfolio mix for you or point to a portfolio mix that might be more in line with your answers
  • We will not make automatic changes to your portfolio based on the questionnaire, but your answers may create an opportunity to discuss whether you would prefer to be a little more conservative or a little more aggressive going forward

Online access

  • See all your accounts and holdings online
  • See your previous monthly statements
  • Get copies of tax slips
  • Change your monthly statement delivery method to email rather than standard mail
  • Many clients have already contacted us for online access. Please let us know if you are interested

Thanks for your patience and understanding through the transition. As we roll out better solutions and services over the next 6-12 months we trust you will see why we are so excited to have joined Quintessence Wealth.

The Globe and Mail Spotlights Elevate Wealth

First Elevate Wealth Management was named as one of the Top 50 advisor teams in Canada by Wealth Professional magazine.

Then we were ranked as one of the Top 10 Financial Advisor Teams in Vancouver by AdvisoryHQ.

And now the Globe & Mail is seeking our opinions for their articles. Check out the latest interview with Rob Parrish that was in the business section of the paper and on their website. Nice profile!

 

Click here to read the article on the Globe & Mail’s website