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.