What the Markets Are Telling Us About the Rest of 2020 and How to Prepare For It

Introduction
What the Markets Are Telling Us About the Rest of 2020 and How to Prepare For It

Following the historic downturn of March, we saw the markets have one of their best months in history in April. What is the current environment telling us will happen for the rest of the year and what are the top strategies we can use to get ready for it?

Greg Taylor, Chief Investment Officer at Purpose Investments, talks with Purpose Financial founder and CEO, Som Seif, about:

  • Three top strategies to earn alternative income in the upcoming market environment as we emerge from lockdowns around the world
  • The unique meaning of “Sell in May and go away” this year
  • Why active management and fundamental analysis matter now more than ever
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Read the transcript:

SOM
Hi everyone, it’s Som, founder and CEO of Purpose Financial and Purpose Investments. We’re 7 weeks into the COVID-19 crisis, and I haven’t actually found the concept of working from home and isolation to be too difficult. I think for many of us, we’ve actually enjoyed some of it. I can have dinner with my family during the week, I’ve seldom been able to do that in my career and it’s so enjoyable. The fact that t 6 o’clock my kids come, knock on the door and tell me to come for dinner has been a real personal highlight of this time for me.

Over the last week, we’ve started to map out what the strategy could look like for how to get our teams back to the office. How we’re going to get back to the principles of working together in whatever the new world will look like. We want to look at the change we’ve gone through over the last couple of months and what parts of that we’d want to implement into our businesses.

But it also got me to thinking about what I miss the most right now. I don’t miss being at the office, per se. In fact, I had to go to the office the other day for the first time since March 5th to pick something important up, and it was very surreal.

What I do miss is seeing the people I care about. A lot of my friends, my colleague, and my partners — I miss giving them a hug. I’m a very social person, and I miss these dear friends of mine and the social aspect of being with them and watching how conversations can go in different directions. I’m sure everyone feels that way, whether it’s with your friends or with your family.

I also really miss the creativity that comes from social interaction and being around others. So much of my innovation comes from the natural collision and conversation flow of someone mentioning something, and we just don’t get that from a work-from-home structure. It’s really hard, although you try.

I really do miss that, and can’t wait to have it back in our lives. But I don’t think necessarily that going back to the office 5 days a week and forcing everyone to be there is the right thing to do anymore. There’s been a lot to learn from all the productivity that’s come from our work-from-home policy.

I’d also like to chat a little bit about the markets. To me, I think we need a little perspective here. We’ve had a really robust April, and I don’t think anyone would have guessed the markets would have one of its best months in history. If you look at the economic situation, it’s pretty hard to believe that the stock market is represented in the real changes and challenges.

There are ways to balance that though, and one of the interesting perspectives that I look at is that if you want to believe that lockdown has created a liquidity situation, or a solvency problem, then you actually could justify one or two ways that this goes forward.

If it’s just a liquidity situation where the markets are being locked by illiquidity, people aren’t buying, and spreads are widening, then I think the work the Fed has done to throw massive liquidity into the market — buying up corporate government bonds, keeping interest rates very, very low, and committing to staying low for a long time — these will have a meaningful impact on supporting liquidity and so the markets are saying this will all be fine and we’ll be in a state of super-charged growth coming out of this.

That’s what Steve Mnuchin is effectively saying and wants everyone to believe, and I think the markets are maybe reading into that a little bit.

On the other hand, if we believe this is a solvency problem where companies are going to struggle because of the economic demand coming out of lockdown will change, that the fundamentals of supply and demand are going to differ, that certain segments of the economy won’t just go back to normal within a certain period of time, then I do think the markets are fundamentally discounting this, especially given the moves that we’ve seen over the last couple weeks.

There’s no one better to talk about this with than my guest today, Greg Taylor, Chief Investment Office at Purpose Investments.

Greg, when you look at the environment that we’re in right now, how do you balance all of this and what do you think the markets are telling us or thinking based on the movements we’ve seen?

GREG
Thanks, Som. It’s really an interesting point you made earlier, and I think people need to remember that the stock market and the economy are not the same thing. People sometimes forget that. When you look at what’s going on with the economy, we try and match that with the stock market and often they just don’t match. That’s because the stock market is supposed to be a forward pricing mechanism.

What the stock market is really trying to tell us right now is that they believe in the second half of the year recovery — that we are going to get through this, that things will start to open up over the summer, and that by the second half of the year we’re going to be getting back to normal.

Where that’s going to be risky is if that suddenly isn’t the case, and I think that’s where we’ve got a bit of risk in the second half of the year, maybe in late August and early September when the data starts to improve and earning start to get better.

SOM
So, you think the markets are maybe discounting what’s going to happen later but what about what’s happening now? We saw a rapid increase in unemployment, in 3-4 weeks we saw the equivalent of what looked like Depression-era unemployment. We can’t assume that all those people will get back to work in 4 weeks just because the economy re-opens. We saw significant revenue impacts on all types of businesses and large parts of the economy had revenue cuts. It’s not like everyone will go back, in the next week or month, to spending at the same levels they were in January, and we haven’t seen that in China.

You’re thinking that the markets are discounting later in the year but what about discounting economic noise that will come out in the first couple of weeks after the end of a lockdown?

GREG
It will be interesting to watch how the markets respond and I think looking at Europe will be a great indicator to see just how those economies recover as the end their lockdowns earlier, in places like Germany and Spain. We have to remember that the central banks across many countries, and different governments have thrown so much at the problem. It’s really to their credit, and they did learn late in the global financial crisis of ‘08 and ‘09 to make programs to respond to the problems. This time they’ve been proactive and that’s gone a long way to make people feel a little more comfortable with how these programs work.

I think the risk is for sure that not all of these businesses are going to come back and not everyone that was laid off is going to be brought back on day one. It’s not going to be a smooth opening. So if people can balance that out. Certainly there will be companies that just don’t make it, but there will also be companies that do thrive in this environment and rise to meet these challenges. I think as an active money manager that’s what our challenges is: To try and figure out the winners from the losers and make sure that we’re not just buying everything but buying selectively in the companies that will come out the other side.

SOM
There’s an adage that says “Sell in May and go away,” and we’re now in May here. I know that going into the end of April you were quite nervous about the rally of the markets and you were clearly telling everyone internally that we should expect volatility at the end of the month into early May. We did see some of that in the trade-offs in the last two days of the week.

What do you think we’re dealing with and what are some ideas investors and advisors can use to prepare, not only for the week ahead but even the next couple weeks?

GREG
I think the market’s done a really good job of pricing in the virus, and basically the end of the peak of the infection. We feel a little bit like we’ve moved beyond the virus, and now it’s about the recession and that the big thing that everyone’s going to be worried about. We’re hyper-focused on data points around unemployment, when the U.S. will open up, when things will start to normalize and how that will actually work.

That’s going to be the big indication of where we go from here. When markets responded and sold off so much in March and then bounced back in April, a lot of that is due to technicals. There are a lot of people with cash on the sidelines and there’s that old adage “Don’t fight the Fed” when the Fed stipulated that you should be in the market because it’s going to rebound. I think that’s really what we had when the S&P 500 rebounded back to the 2800 level.

Now last week was really interesting because it tried to break higher and it really couldn’t do it. At the same time, we started to get questions about the pace of the recovery, whether it was a good or bad thing. Add on top of that we got more China tensions, as the actions of the U.S. government are now starting to blame China. That’s not a healthy thing. If you remember back to 2019 it was all about concerns due to the U.S.-China trade tensions and that seemed to go away, but it’s rearing its ugly head again last week and I think that’s something that wasn’t priced in the market and that caused some of the volatility for Friday.

Now going forward I think there are a few things people should be reminded of on how to work in this environment:

For sure, we’re going to be a low interest rate environment for a number of years. Our rate globally now has been taken to zero. Everyone still needs their income and people are going to be looking for different income strategies. Dividend-yielding equities shouldn’t be the sector that wins coming out of this, and I think that’s an area people are going to be looking to for alternative sources of income.

Next, options-writing programs, again, are the way to earn income like what we’re doing with our premium yield product. I think having options to earn income is something that’s going to be attractive in a market that’s going to be more volatile throughout the summer and potentially into the second half of the year.

The third thing I think people should remember coming out of this is that gold has a place in people’s portfolios. Gold has been one of the better asset classes over the last two years and even in the last few months it’s proven to really be something that can work. I think investors should be reminded of what gold does, and this is the perfect environment for it.

SOM
Interesting, and so gold bugs are back alive and dividend investing, and I know we talk about this, isn’t just about buying all dividends. If there’s ever a time when a company’s going to hide under a cover and they’re nervous about cutting a dividend in the past, this has been it. I agree that dividends are going to be attractive but sustainable dividends are going to be even more attractive.

GREG
Oh absolutely, and we’re coming into a period again where active management and fundamental analysis are going to be things that everyone needs to do. You can’t just buy a basket of high dividend yields anymore because so much is going on behind the scenes, from government programs and sustainability of whole industries. We really need to know what the companies are doing, how strong their balance sheets are, and how safe that dividend really is. I think we’re entering a period of time when active management should out-perform passive. You need to do your homework and look into companies that will come out the other side of this and that will be able to pay out that dividend in a sustainable manner.

SOM
Spoken like a true active manager. Greg, thanks for taking the time and sharing your ideas. I agree right now, just to have a balanced view right now. The markets are going to act ahead of the curve here and I think there’s still a lot to be figured out. It’s ok to be cautious but it’s also ok to be long-term minded and just buy great assets for the long term. Thanks, everybody and thanks to Greg.

Author

Purpose Investments

Purpose Investments is where thoughtful Canadians invest. An asset management company with more that $8 billion under management, we create meaningful long-term success by focusing on our core values.

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