By Scott Blair
I (Scott) grew up on a steady diet of John Wayne and Clint Eastwood movies. Not your thing? Please indulge me with this one. When there was an inflection point, when the level of fear and greed met one another, there was always a clear winner. Calm, calculating decision making always made for a happy ending. Good guys always win.
That theme can be applied to the stock market to this day. We have recently seen a short pullback in the North American equity markets. Upsetting but again, short term. That is the fear factor.
Here is an interesting stat to illustrate the consequences of giving in to the fear, and selling. In the last 12 months if you had missed (i.e. been out of the market) the best 5 days of performance, you would have lost 50% of performance YTD. If you had had been out of the market for 10 days, you would have lost 90% of performance YTD. This is astounding but at the same time the message is that you should never be out of the market entirely at any level.
We are not at an inflection point in our opinion. We are at the continuance of an upward market fueled by low interest rates, low inflation and a growing demand for commodities, including oil. Year to date in both Canada and the US we are up 15%. By anyone’s standard that is way beyond expectation. We have seen voliatility in the equity markets but certainly not any kind of reversal of fortune.
Speaking of oil, all of the enthusiasm around solar, wind and even wave generation of energy is very interesting. Having said that, very interesting doesn’t mean a ground shift in terms of usage yet. Oil is here to stay for now. Out of one barrel of oil, 60% is used for transportation, the remaining 40% is used for industrial and commercial products like your clothing, and all kinds of other every day products. We will likely continue to see higher energy prices for the near future.
What does it mean for Canada?
In Canada as investors, we have what is called a “home bias”. In other words, most of us own a higher proportion of Canadian equities than would otherwise be appropriate. We are more comfortable with TD than HSBC or BNP Paribas. In the current world, Canada is well positioned once again. There is a global demand for commodities meaning energy and materials. For the most part, that is all we have and given the strong correlation between those sectors and the Canadian banks, it would seem we are in a sweet spot here in Canada. We have been increasing Canadian participation in portfolios.
The bottom line
In the clear view of higher volatility with a current VIX of 21 and 300 point swings daily in the DJIA, we stick with the current thinking that calm will prevail, there is nothing really to be feared. The good guys will continue to win.
Photo by Taylor Brandon on Unsplash