Investment Focus | Issue 7 | Down, Up, Down, Up, Down

Investment Update – Down, Up, Down, Up, Down

This week has seen some incredible volatility on world markets, with large swings both up and down. As I write this, the Dow went from 400 points up to 300 points down, and back to 100 points up (in 30 minutes).

It’s difficult to see negative headlines every day and see markets continuing to slide without it affecting our emotions.  In fact, our brains are hard wired to make place a value on emotion during times like these.

Erik Ristuben, who is the Global Chief Investment Officer at Russel Investments, wrote a good article yesterday about investor behaviour during extreme volatility.  He states:

“Our survival instincts tell us that pain is bad and that we should distance ourselves from pain. This ingrained behavior keeps us alive when our physical lives are threatened. The problem is that in too many cases, the fear overwhelms the intellect. That is why every individual investor behavioral study that I have seen, everywhere in the world, has come to the same conclusion: that we as humans buy high and sell low, and do it over and over again.”

Following our flight instincts when the rest of the herd is panicked is not a survival tactic that carries over very well to investing in financial markets.

A good analogy is looking at how people react to retail sales.  How do people respond when there’s a significant markdown in prices at their favourite department store?  They run into the store searching for bargains.  How do they respond when there is a significant markdown in prices in the stock market?  They often run out of the “store” and don’t return until prices get back to “full retail.”

That’s easier said than done, especially when we are having to deal with unprecedented fear and anxiety in our personal lives as well.  However, you can be assured in the fact that fund managers are pulling up their sleeves and are hard at work.  This is the time most have been waiting for, to scoop up stocks at a bargain.  Many managers feel the market is way oversold, regardless if it goes down further or not.  Win Murray, a portfolio manager at Oakmark, was quoted yesterday:

“We think that the current stock market declines are well in excess of the actual economic loss

that’s likely to be experienced by these companies looking out over the next 5 to 10 years.” 

He doesn’t feel that most of these companies are worth half of what they were trading at three months ago.

Warren Buffet was quoted:

“Fear is now widespread, gripping even seasoned investors. But fears regarding the long-term

prosperity of the nation’s many sound companies make no sense. These businesses will indeed

suffer earnings hiccups, as they always have. But most major companies will be setting new profit

records 5, 10, and 20 years from now.”

Jurrien Timmer, Director of Global Macro at Fidelity, was quoted:

“We’re certainly very oversold.  We’re at levels of ’08, of ’87 crash, 1970, even 1929, 1930. 

So you can count on almost one had the times that we’ve been this oversold.”

Bill Ackman, a well-known hedge fund manager, who has been very bearish lately has started buying up beaten down hotel stocks, which we know will be suffering for quite some time. 

Time to Recover (from peak before crisis back to same peak level)

• 1987 Market Crash 21 months
• 1998 Russian Bond Crisis 10 months
• 1997 Asian Financial Crisis 95 days
• 9/11 Terrorist Attack 47 days
• 2008/09 Subprime Crisis 28 months
• 2020 Covid-19 Crisis TBD

This chart shows how frequently we have had market declines and how long the market took to recover on average.

Looking Ahead

We expect to see more market volatility in the weeks ahead.  However, for many Canadians, the markets are not the only worry, as many are experiencing job loss or reduced income.  Our communities are being impacted by fear and preparedness as families listen to the advice of our leaders in government and the medical community.  Now is the time for us to do what we Canadians do best – take care of each other.

Our team is fully operational despite the crisis we are facing, if you have any concerns of any kind please reach out to us.