All views expressed in this video are provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities. The statements expressed herein are not intended to provide tax, legal or financial advice, and under no circumstances should be construed as a solicitation to act as a securities broker or dealer in any jurisdiction. All views are intended for general circulation only and do not have any regard to the specific investment objectives, financial situation or general needs of any particular person, organization or institution. Please do not hesitate to contact us should you want to know more about the information contained in this video or have any related questions.
CANACCORD GENUITY WEALTH MANAGEMENT IN CANADA IS A DIVISION OF CANACCORD GENUITY CORP. MEMBER – CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA.
Investing in securities conveys different types of risk, including the loss of principal.
The views expressed in this commentary are the views of Rob Tetrault and are subject to change based on market and other conditions.
Please consult with a tax specialist for further information and to help you determine if these strategies are suitable for you.
How To Invest During Stock Market Crash in 2020
Most investors have the urge to either “sit this one out” or time the market. Research shows that the disciplined investor who focuses on the long-term plan usually wins in the end.
In response to the global outbreak and current period of market disruption, Rob went LIVE on social media on Monday March 23rd 2020 to discuss investor education and guidance on making sound decisions during this current market volatility.
TRANSCRIPT OF LIVE SESSION
? Wealth Management During 2020 Crisis ?
Okay, what we’re seeing here is for sure unprecedented, definitely in terms of impact on society. Before I get into it, I’d like to mention a few things I won’t be talking about. I’m not going to mention stocks, I’m not going to mention individual securities.
I will however mention sectors, asset allocation, the strategies and stock prices movements generally, but I’m not going to be specifically talking about individual stocks. This is not market call on BNN where I can give you guys, my top 10 picks for the next month or two.
What I would like to do today is answer your questions about what’s actually happening in the market price discrepancies. I’m not going to talk about the actual impact of the virus and what I think is going to happen, or how many people are going to be impacted. I’m not an expert, I’m not going to pretend I am. Everyone’s reading, everyone’s Googling stuff.
The idea is for us to be having a discussion about the impacts of investments. I’m going to open up the floor to any questions that anyone’s got right now with respect to investments.
In the meantime, I’ll get started with my overall macro-economic outlook as to what’s happening, first of all, corrections like these have happened 10 times ever in our lives. We’re talking about a 33% -34% correction right now as I’m recording this.
The good news with respect to today is that we’re not seeing 2,000 or 3,000 point swings like we’ve been seeing lately, but we are still seeing a movement in the stock price. What is causing that? It’s uncertainty, it’s the human effect. I just mentioned it but, we’re now at a 33% – 34% market correction.
We’ve seen these types of corrections before. We can think of 1929 as the first time this happened, that was an 80% correction. It took 34 months for it to come back. During the second world war we saw a 30% correction that took 37 months to come back.
In 1962 there was cold war jitters, Cuban missile crisis fears, that caused a 29% – 30% correction, that took about six months to bounce back. If we keep going down the timeline, late into 1973, 1974, there was, the Arab oil embargoes, energy prices went soaring. The opposite of what we’re seeing right now, still a lengthy recession, that was a 48% correction.
Nobody talks about the oil embargo correction, but it’s actually bigger than most of the other ones that you’ve heard of. If my dad were here, he would tell us all about it. He remembers the oil embargo. He remembers 1987 which was the next big market correction.
What happened in 1987 basically happened overnight. We had a 23% correction in one day. To put that into perspective, last week was a fairly bad week relative to the markets. In fact, it was the worst week since the great depression. It was down 17% in one day.
My dad always tells the stories of how it was on that day in 1987, on the trading floor and how it just wouldn’t stop, It wouldn’t stop, It wouldn’t stop. 23% in one day in today’s markets when we were at 30,000 points, that would be just under a quarter. It would be around 7,000 points or so on the index.
Are the U.S. and Canadian federal banks intervening?
Two interventions got announced. First of all, there’s two kind of sides of the intervention. First, let’s talk about the bank of Canada. They are the monetary policy. They decide how many dollars are printed.
What should they be buying assets with our dollars and what they should be doing whereby the government, Canadian government, US government, other governments, they announce stimulus packages. They’ll announce tax cuts, they’ll say that small businesses don’t have to pay taxes. They’ll send everyone a check.
All of that is what’s happening. Two separate fields. First of all, let’s talk about the U.S. feds. They announced this morning. A blank check, basically we will write whatever amount you want, whatever amount we need to write to buy back bonds, fixed income assets, balance sheets to make sure that there is liquidity in the market. That’s an unprecedented move. And in my mind it’s helping prop the markets today. Are the feds intervening? definitely.
Now we’re talking about government intervention. I firmly believe right now where we are, it’s not a surprise if I tell you that there’s going to be a lot of unemployment.
We’re going to have two choices. We’re either going to go down the path of, we will take care of those we can or something like that. Or we’ll go kind of do something more down the Denmark road, which is going to be some sort of level of, universal care. Everyone gets something and no one is going to be hungry. No one’s going to be without food in Canada.
If I were a gambling person, I’m going to guess that we’re more likely to go the Denmark way. With respect to just making sure everyone’s taken care of for however long it takes.
To answer the question, the federal intervention, will it have an impact? I believe it’s propping up the market right now and I believe that the U S government intervention, the Canadian government intervention, they won’t have a choice but to intervene.
It’s going to be something we’ve never seen before. The amount of money that we’re going to put towards this program. We’re talking four or 5 trillion in the U S for support. And maybe 10% of that in Canada. Those are numbers that are unheard of.
If we go back to the world Wars, when good people had to fight. Now we, the collective, we have to fight against, maybe losing our livelihood forever. And we spent up to 30% or 35% of the GDP in one year. Now we’re talking about measures that are going to be 3% – 6% of the GDP. This feels like a ton of money, but there’s a lot more room for that. Hopefully that answered the question.
Given the nature of this correction, how does one compare this correction to the other ones you mentioned?
You can compare these corrections on a percentage level, I have a chart here for that. I’ll start by looking at the worst corrections in history and they start at 80% with the great depression, but the majority of them are in the 30% to 40% range of the worst corrections ever. Now what I really like to see is the forward returns from the bottom, when you get to the bottom, Forward returns for your one-year number on average, these 12 bear markets has been 52%. Your three year number, 88%. We’re talking total returns from the bottom.
Where should we be investing right now to offset the losses that we are experiencing?
I’m going to tell you what we are doing generally for our clients. Do not take this as investment advice for you personally. I don’t know what you have or your personal situation. But I will say this, our view is that this is an unprecedented generational opportunity to buy quality assets. Now there’s two ways you can play this.
You could either say, I’m going to buy airlines, casinos, a carnival cruise companies, cruise companies and I’m going to make five, 10 times my money when this thing comes back. Cause they are down. Some of those are down 70%, 80%, 90% maybe that’s how you want to play it. And that’s what I would call speculating.
That’s speculating because I don’t know. I don’t know for sure if, if those are going to come back. I think they are. I have a gut feeling, I do believe that we’re going to fly again and there’s amazing opportunity there.
But for now, let’s focus on quality, that’s what we’re preaching. There are some real high-quality names that have fallen 30%, 35%, 40% from some sectors, you real estate, financials, infrastructure, insurance companies. Those are all companies or sectors that generally come out of these things in really good shape.
Do I know for sure how the bottom’s going to look what these companies are going to do, how they’re going to bounce back? I don’t, but I know that, one, they’re paying extremely solid dividends. I also know that two, I don’t think that the government can let those companies go bankrupt.
But regardless when this thing turns around, you’re going to want to have been paid a dividend in the meantime, and you’re going to want to have gotten that yield either through a dividend stock or real estate, and you’re going to make the capital appreciation.
To answer the question about where we should be investing, our view on that is, we’re sticking to quality, we’re sticking to quality, and we’re also legging it.
To get back to your question, we suggest legging in what does legging in mean? We suggest whatever money you have in the sidelines that you are willing to invest, write that number down on a piece of paper. Whatever that number is take a portion of that and now you’re invested.
Okay, say You got half of that invested in the market, one of two things will happen. We’re either not at the bottom, and you’ll have more ammo to purchase more stocks or we’re somewhere close to the bottom and you’ll have participated somewhat in the rise of the equities.
What you do not want to happen, is for you to be in a position where you’ve saved this money, you’ve accumulated wealth, you’ve got cash, and you were prudent and you kept it out of the market.
And now, you finally get this unprecedented opportunity to invest. And what do you do? You wait, you wait too long, and then you miss the rally. That’s what we do not want to happen.
Does the aftermath of job losses and mortgage defaults currently affect what’s priced into the market?
Remember that the market is a 24-hour instrument that is always trading. It’s always a reflection of people’s views and values about what an individual investment is worth.
If I think a stock is worth more, I can go and buy it. Therefore, the stock will improve. The entire market is reflection of the future value of these securities. Everything that we know, that you guys have read online is priced into the market.
To answer the question, job loss, mortgage defaults, recession, that is what you’re seeing. The market’s currently moving, and that is currently driving the selling. When you see that it is extremely difficult for you to make a statement that the market is not pricing, you’re basically saying that you know more than the market, right?
If I know for sure that the market is going to fall, or I know for sure that the market’s going to go up, you’re basically saying, I know more than the market. That’s a tough game to play because right now, the stocks are not trading at any rational valuation. They’re trading on no multiples.
What’s happening to the fixed income market?
First of all, fixed income, we’re talking about bonds, bonds, or preferred shares. What’s happening to the bond market?
The bond market is a somewhat illiquid market in Canada. Illiquid means less. It’s less sales, right? If you have an extremely illiquid stock, when the stock goes no bid, you’re basically trading at zero because nobody wants to buy that stock.
Now, that doesn’t happen with bonds, but there’s less bids when you have guaranteed investments, this has happened right now in the Canadian fixed income space, some guaranteed investments some fixed income instruments are trading at a 10% to 15% discount. Now, these are guaranteed instruments. You can get some really nice corporate debt. If you have any exposure to equity, any exposure to equity whatsoever, and you’re thinking of getting out, obviously I would argue against that.
If the world falls apart and we let some of these companies, go bankrupt. Yeah, there might be some default rates. I certainly don’t anticipate 10% to 15% of Canadian companies going bankrupt. I just don’t see that happening.
But, if you believe like I do that the Canadian economy and the Canadian government won’t allow some of these massive companies, massive insurance companies, massive Canadian banks, that have billion-dollar balance sheets. If you believe like I do that, that the government will not let them go bankrupt, then those are phenomenal plays. Like those are going to be unbelievable purchases. If you own some of that, you know, I would advise you not to sell it on the fixed income.
Would you consider selling a position at a steep loss and buying another position for potential higher returns?
This would be kind of the selling your airlines and going into a bank stock. The answer is not that simple. Basically, it depends. That’s a terrible answer and I apologize for getting a terrible answer but it depends. If those positions no longer make sense with your investment picture, if someone’s retired and those are speculative positions right now in your portfolio.
I think people are going to go back to Vegas and people are going to go back to casinos. I think people are going to go back to the strip and go back to flying. I do believe that, I don’t want to sound like a doomsday on here folks because I’m incredibly optimistic.
But I’m also speaking at a time when the markets are down 35%. I believe that those are going to come back. And if you own them, ask yourself, why did you own them in the first place? Why did you own those companies? And if they’ve now become too risky for your portfolio, it might make a ton of sense to sell those positions and to replace them with quality Canadian equities that you know, likely won’t move as much.
Are dividends safe? Are there companies that have been paying dividends for a hundred years?
There are, there are many, specifically the five that have not moved. Their dividends are… surprise, surprise, the Canadian banks now on the U S side. If I looked at the comedian banks, bank of Montreal has been paying since 1829 bank of Nova Scotia since 1832 TD since 1857 CIVC since 1868 and Royal bank since 1870, that’s 150 years, at least for all those companies.
They’ve never missed a dividend payment. When we talk safety of dividends, I cannot see a situation, where the Canadian banks cut their dividend. That’s my point. That’s the end of, that’s my point on that.
Safety of dividends. Some people ask me now what other companies might cut their dividends. Well, I think you’d be a fool to think that there won’t be some dividend cuts in the oil and gas sector. That’s happening. There will be some dividend cuts in the oil and gas sector. They’ve already started. You know, you’ve got companies like Suncor that need a $30 barrel of oil to sustain. And most of those companies out there need way more than $30 barrel of oil.
But let’s, let’s back it up a bit.
What’s a dividend?
A dividend is a distribution that’s issued by a company that the profits are paid out to shareholders.
Historically, that’s what it’s been, maybe you own a private company, maybe you own, for example, Bill’s plumbing and Bill’s plumbing had a really good year and Bill’s plumbing is paying a dividend to the shareholders and maybe the shareholders are bill, his wife and his son.
And those three shareholders are collecting a dividend. But in the public space, where stocks actually trade, what you get is declared dividends. Every quarter, if I’m the CEO of a bank or a financial institution or real estate, I’ll say, here’s the dividend we’re going to declare we are going to pay X many cents.
Historically, public company dividends from these multibillion dollar companies, they’re extremely stable in how they want to emit their dividends and how they want to declare them.
You rarely, rarely get a dividend cut unless it’s an extreme urgency or an emergency, typically you’ll see that in the volatile sectors, oil and gas being one of them. We typically won’t see that kind of volatility in the financials. Like I can’t imagine a situation where they would cut their dividend. Hopefully that answered the question.
Can anyone here see a situation where they would cut the Canadian dividend? Do you guys see that? I personally don’t.
Should we be sitting in cash as we near the bottom?
The answer is unequivocally no. Okay. let me extrapolate that a little bit to here’s why. Because this is the emotional cycle. Human beings unfortunately are the worst at making short term investment decisions.
It’s a fact because two things move the markets, fear and greed.
Right now, guess which one’s moving the market? It’s fear. It’s extreme fear. People are freaking out. This cycle happens. I have a video on this. And I did it two weeks before the crash happened. And finally, the last one at the bottom, you get this courage, what do you do? At the end of a market bottom capitulation, capitulation is the word where everyone who wants to be out of the market is out.
All right? Everyone who wants to be out is out. The only people that are left are individuals like you guys who are saying, well, you know what, I got 50% of my portfolio in stocks. I got some fixed income, I got some alternatives. I’m having to wait for this to come back.
Right?
I feel like there’s a lot of that sentiment and he was among my clients, we were more defensive than most. Capitulation will happen at some point. I don’t think we’re there yet. But to answer the question the reason we want to be invested right now is not because we know this is the bottom. In fact, one thing I know for sure is that I don’t know where the bottom is.
If somebody ever tells you for sure, for sure, for sure they know where the bottom is. Call BS on that right away because you don’t know where the bottom is. I guarantee you don’t know where the bottom is because it’s not moving on rational basis. It’s moving on emotions and you don’t know what emotions are.
You don’t know what everyone else feeling in the entire planet. And plus, you get liquidity issues too, right? Back to the point about, getting out. What happens inevitably is that people go “you know what, Rob?” Or, “you know what advisor? I can’t do this. I know I only have 50% of my portfolio in stocks, but it’s too much for me. My husband or my wife is mad at me. I can’t do this, just sell me of here. And I’m okay with just these losses. Okay?” And there’s a bunch of that that happens.
When the last person who decided they want to be out is out, that’s when once you have the reverse of what’s happening now. Now you have no more to sellers. When you have no more sellers, no more people that are selling the people that want to be out are out, and the people that believe in it long term like me and you are still in, you get the opposite that happens.
You get people on the sidelines saying, “you know what? I’ve been sitting on 1 million bucks here. I’m going to put it in the market.” You get buyers, you get institutional, you get smart money like Warren buffet.
Do you guys remember in March, 2009 when the market was hitting all time lows, the market had corrected 57%. And one of the key turning points in moving that market, as crazy as this is, is when Warren buffet said, you know what, I’m going to put my cash to work.
I’m going to start buying companies right now. And, lo and behold, the markets are turning right? because now you have no sellers. You get the reverse. Now don’t get me wrong, it never rises as quickly as it goes down. It never does that. The drop that we just saw in the last month, that’s unprecedented and we will not see that on the way back up. But what we don’t want to do, is we don’t want to miss the opportunity to buy.
The reason being, the largest positive days ever are always occurring in bear markets. Bear markets are what we’re seeing right now. The largest positive days always occur on the outswing of a bear market. And that might be a 10% day. It might be a 12% day, it might be a 15% day. And if you miss that one day, you know you’ve missed your entire year’s worth of returns.
The opportunity costs of you being out of the market, you being out of the market and not getting that return, it’s just not worth it. We don’t know how close we are to the bottom. I don’t know. My gut tells me we’re getting there. I have a lot of conversations with a lot of people and I do sense that we are getting there. But again, I don’t know and I don’t I don’t want to lie to you guys.
If you have a portfolio that is well-constructed for you and as well constructed for your risk tolerance and for your cash needs, you’ll be fine. Folks, I hate to sound like a broken record and I hate to sound like the guy on the TV. But once it turns, you do not want to miss that party.
How much of a big fall is caused by robo selling?
There’s a couple of things that happen with robo-advisors. First, when you sign up to become a client of a robo advisor, you get a quiz. The quiz then forms your asset allocation and the rebalancing happens at the same interval. When they’re rebalancing, they all kind of sell at the same time. They all genuinely go to cash or go to fixed income at the same time.
What happens when robos and algorithms are selling across the board you can’t have a movement of a thousand points in 20 seconds in a market without it being partly algorithms and nonhuman.
Like to me that’s extremely obvious. But you know, we had a day here a week and a half ago where the one-minute chart on our screen looked like something had fallen off the cliff.
But how much of it is robot? I don’t know, but it’s certainly a part of it.
Have any of you guys capitulated?
Have any of you guys kind of sold off and said, I’m going to go to cash? That’s enough for me.
For me, when a client calls, we give our best possible advice. We tell them, the absolute best, what we think they can do. But if someone is absolutely at the world’s end with respect to capitulation, you know, there’s oftentimes nothing we can do, but we do know that we’re that much closer to the bottom.
I’m now extremely optimistic about the opportunities that are being present. Yeah, we had talked a bit about opportunities earlier, opportunities that are being pressured.
Does anyone know the difference between a recession and a depression?
First of all, what’s a recession? A recession is two consecutive quarters of negative GDP growth. That is going to happen in Canada for sure. the depression or recession, two consecutive quarters of negative GDP growth.
Depression, there’s no kind of formal definition, but it’s typically known as three consecutive years of negative GDP growth with a 10% reduction in GDP growth. Like that would be just, I don’t think that, I don’t think we’re going that way personally. I think there’s going to be a recession, but I do think a ton of stimulus is going to do some wonders for our economy once we deal with the virus.
What is leveraging?
I’ve done it personally in my account. Leveraging is when you borrow to invest. You’re borrowing either from your margin account, from a bank, from your line of credit, from your house, and you are borrowing money and then you’re putting that in the market. The idea with leveraging is that you’re going make phenomenal returns most of the time. Most of the time you’re going to make a ton of money because you’re borrowing at extremely cheap, extremely cheap right now.
As long as your money is generating more than 1% you’re going to be way ahead. That’s why they call it a lever because you move it a little bit and it moves a ton on the other side.
Now it’s a two-way street. The same thing that happens on the way up happens on the way down. When you’re borrowing, you’re investing more than you actually have while you get hammered on the way down with leverage as well, which is why we always practice prudent leveraging.
We don’t have many clients that are leveraged, but if they do, we’ve kind of been practicing de-leveraging at some point. Does anyone know what a margin call? Basically what happens with a margin call is you have assets and then you have a loan. And once your loan, the value of your assets becomes more than your loan, they call you ring, ring. Who’s on the phone? Well, it’s me and I want you to sell your stocks because you’re over margin or you’re under margin.
They’ll force you to sell your securities. And when will you be selling your securities? always when the market’s at an all-time low, they call it a squeeze. Then typically, you know, you have that day or two days to sell, maybe three days to sell.
Now you’re selling at the absolute bottom and you still have the loan to pay. If you can’t afford that on a casual basis, you must be extremely careful with margin.
What sectors and alternatives should I be getting into?
Maybe I’ll start with the gold sector. There’s a question here about Barrack. Um, some companies, closing. Now the gold prices, I look at my screen here today, they are up like they were up like 50 bucks today. I, and again, I’m not a huge believer of owning bullion.
I recognize that some of you on there are saying that bullion is a great hedge. It’s a good hedge against inflation. It’s a good hedge against the stock market. I get it. I understand that. But we’ve also gone through periods of, 10 years with zero return. I’m okay with owning gold.
Companies that are profitable, that have a solid balance sheet, those also act as a good hedge relative to just owning straight equity. Or are they, are you getting all the bang for your buck that you can with a gold stock? That sector, some of those companies are not going to survive. Some of those companies are going to get beat up. There’s going to be some damage there too.
There’s going to be some blood there. So just be very, very careful which companies you’re investing in there. They’re not all safe and guaranteed.
Now let’s look at alternative investments. The question is, are alternative investments risky? Generally, my answer here is no. Depending on what you own, it can be. If you own liquid alternatives, if you own a hedge fund, those are risky alternatives, right? You don’t know what the portfolio manager can do. He can buy and sell the entire portfolio and go long go short. You have to be extremely careful because you’re effectively trusting someone with the ability to gamble with your money.
Hedge funds had a hayday in the 70’s, 80’s, 90’s. We see them less now. Now you’re seeing more what’s called liquid alternatives or pure alpha funds or, uncorrelated risk funds, stuff like that where the portfolio manager is trying to generate a return for you regardless of what’s happening in the market.
The other alternatives that I’m a really big fan of is private real estate. If you’re my client, you’ve heard me talk about this in the past, you’ve heard me talk about it at length on BNN, private real estate in my view, is going to have the growth, they’re going to dramatically outperform. With that in mind, I think they have done well.
They kept their value, it depends what you own. If you own retail, if you own residential, if you own commercial. But people are going to need to pay their rent, right? if you own multifamily, private real estate investment trusts, there may be a period of time where some people aren’t able to pay their rent.
That’s possible, but if you still own the real estate, you’re likely to be very, very, very fine. We’ve been preaching defensive assets for a while. We continue to believe that defensive assets will outperform in this next market cycle.
Thanks so much guys. I’m Rob Tetrault from www.robtetrault.com You know my YouTube channel. You know my Instagram channel? It’s at @robtetrault. My Facebook is Rob Tetrault. We’re going to do this again.
