The North American stock markets went up more or less steadily from March, 2009 to March, 2020. There were spurts and bumps along the way, but as many noted, it was the longest period without a recession in US economic history. Many market watchers predicted that, sooner or later, we would get a significant market pullback. Now, they are right.
However, I don’t know of anyone who anticipated a market meltdown as a result of a pandemic, exacerbated in Canada by an oil price war between Saudi Arabia and Russia. It was certainly reasonable to assume that at some point there would be a run-of-the-mill market correction, and we were absolutely prepared for that. But it is important to remember that, before the health crisis, the US economy was humming along with record low unemployment, high consumer spending, accelerating housing sales and interest rate levels that made liquid alternatives to stocks quite unattractive. Under those conditions it was, in our view, the right thing to be invested in high quality stocks to the extent that our clients were, and are.
The market reaction to the current situation has been abrupt, brutal and indiscriminate. As we saw in 2008/09, good companies are being punished along with the bad. The liquid names such as the big banks, telecoms and tech stocks have been sold off simply because they are liquid and can provide ready cash. At times the bond market has been very illiquid and therefore prohibitively expensive as a place to raise cash. We are now at market levels where high quality companies are trading anywhere from 30% to 50% down in one month, and dividend yields have climbed commensurately. We can now get cash-on-cash yields in the 5% to 8% on stocks where we believe the dividend to be safe. In a world where the 10 year bond is trading at well under 1% those yields are very, very high and accordingly very attractive.
We (along with everybody else) do not know what will happen next. We do know that markets do not go to zero, do not go down indefinitely, and that when we view what our clients own as businesses rather than trading vehicles, we see a lot of great businesses on sale. We are also seeing unprecedented monetary support from the US Federal Reserve system, as well as huge fiscal support for the unemployed and struggling businesses from governments all over the world. These measures will not restore the economy to its prior state but they will certainly be helpful.
Most of our clients know that we always emphasize the difference between price and value. Rarely have we seen that difference grow to such a wide extent. Warren Buffett reminds us that the market in the short run is a voting machine. Right now, it is voting against stocks. But in the long run it is a weighing machine, carefully assessing and measuring value. Buffett became one of the richest men in the world by understanding that. We believe that it is quite likely that his company, Berkshire Hathaway, is right now taking major positions in beat up stocks.
In the last financial crisis almost all of our clients remained invested, and while they put up with two years of pain, in the end it was the correct decision. During that period, of our 400 or so client families, only 12 bailed out. Many of them did so near the bottom of the market, and did not benefit from the major surge we saw starting in March, 2009. From its low point, the S&P 500 doubled in 14 months. Almost everyone who sold out in panic or despair missed that huge upward move.
We don’t know (nor does anyone else know) how this world-wide health crisis will play out. The circumstances are to a great extent unprecedented, which means there are no similar past experiences to guide us. However, we know that life will return to the economy, and that well financed, soundly managed businesses will return to profitability.
We urge you to stay the course, but we recognize every client has his or her own particular needs and risk tolerance. Your portfolio manager is available and happy to discuss this with you.
