There is certainly some tongue in cheek language in the opening title. Suffice to say, it was anything but fantastic experience for most investors during this past 90 days. For the record, during the past 90 days, most major markets in North America were down -7.5 to -8.5%, and the experience in the rest of the world was approximately -12%+. We have lived through challenging environments in the past, only to get another version of difficult environments. With the benefit of hind sight, most analysts will universally blame the recent market malaise on either the US Central banks failure to launch a rate hike, or China’s slowdown and its spillover effect on the Emerging Markets (EM). It’s interesting how easily investors can be swayed to focus on the recent headlines following the underperformance of EM stocks vs. the S&P 500. In the prior decade, the S&P 500 underperformed the EM almost 60% of the time. This obsession with recency and forgetfulness of longer term results, is the opportunity for patient investors to pick up. As Warren Buffett has always remarked, this is when the best opportunities present themselves.
What are we hearing?
The technicians are talking up a very loud banter these days. We are hearing things like head and shoulder tops and the quantitative think tanks have posted notes about going to 100% cash in their funds. In more absolute actions, a macro strategy funds based in the US recently said they were giving investors back all their monthly after year of negative performance. Yes the noise is loud and in many respects very negative.
We have written about energy at several points along this continuum and have dipped our toe in on the way down and lately have become more vocal around the opportunity. Energy has been the sore spot in Canada for the better part of the past year. Our friends in Alberta are feeling the pinch more than most, as house prices are declining and jobs are being lost. However, this story is not a new one. There have been several boom and bust experiences in the energy space over the past few decades and those with some tenure in this space, will suggest they have seen this before. The scope and duration might feel different this time, but in the end the world keeps burning fossil fuel. This brings us up to what is happening right now in the energy space. It appears that there is some bottom fishing happening to start this quarter with some seriously distressed names posting some big returns. Is this a typical “Dash for trash?”
The chart below shows the longer term view of oil (West Texas Intermediate) against the exchange trade fund XOP – a representation of the S&P Oil and Gas Exploration and Production Index. We stretched it out to 5 years for some close historical context.
Source: VIP Wealth Solutions and Bloomberg
The biggest question is always, “Are we there yet?” At the bottom that is. The answer is always the same; just one person gets the bottom price, just like one person wins the lottery each week. As Warren Buffett would further suggest – it would make more sense to buy energy companies when oil is $45 or $50 versus buying when oil is $100. Today we still find ourselves at the lower end of this band.
Proof that energy assets are cheap surfaced recently when Suncor announced an unsolicited takeover of Canadian Oil Sands. This seems to be the catalyst to get this beaten up sector hopping and has likely resulted in many investment bankers putting in longer hours.
So are we there yet?
The simple answer is – well, not so simple. The valuation reality is that the Price Earning (PE) of the S&P 500 index is neither cheap nor expensive. More recently, the chart has looked a bit cheaper and this has created a lot of chatter around the comparison to 2011. However, at that prior point, PE multiples had compressed to the 13 to 14 range.
Source: VIP Wealth Solutions and Bloomberg
The chart above is on par with the recent pullback we have experienced in global markets. If history repeats itself, then yes we are there now (bottom) and have just been thorough another one of those gut wrenching pullbacks that “normally occur” and we should be on our merry way higher again. As always, heads or tails.
Yes, the US Federal Reserve is perhaps the biggest sting to the current state of confusion around capital markets, at this juncture. At the beginning of August, forecasters expected a rate increase sooner than later, only to change their mind and now forecast a rate hike later into 2016. Does the sound of a can being kicked down the road sound familiar to anyone?
Below we have posted a chart of the probability of an interest rate move at the next Central US Bank meeting. As is evident, this rolling assumption or forecast has been more recently in negative capitulation. If we were totally emotional on this, one would extend this chart to the below zero assumption and start writing about more Quantitative Easing for the US, yet the world is round not flat. For now, we see the bias is to keeping rates lower for longer.
Predicting rates will continue to be an outsized challenge for economists and forecasters because there remains a lot of questions around how the real economy is actually doing.
Source: VIP Wealth Solutions and Bloomberg
This chart basically suggest that we should not be expecting a move out of the FED on interest rates at the next meeting (Oct 27/28). If there is a surprise to the consensus and there is a rate hike, it could be a scary Halloween for those that are proven wrong.
With the election right in front of us, it would make sense to see if there is any market implications around the new/old leadership.
Really there is only history around the colours blue and red, meaning Conservatives or Liberals. This is more fun than anything else. If you look at the chart below, it shows the Toronto Stock market return for all PM in these two parties. Note one of the shortest tenures was Joe Clark, yet it was one of the best periods for the TSX. Whoever wins the election this month, should be starting with a bit of a tailwind. WHY? Well Canadian assets are depressed or have been in selling mode. Can it get worse from here? Yes, but there has been some pretty serious discounts. Take tin (5 year low), or oil leading some of the headlines down over 50% from its peaks last July of $95.47.
The detail in the headlines below could be chalked up to luck. We are pretty sure that Stephen Harper had little to do with the decline in energy and commodity prices in the past year. It could also be argued that the 20% pullback year to date in live cattle had little to do with his party’s political actions.
The bottom line is, it is an interesting chart to discuss or share. As the election race goes on, we would not expect it to change the price of pork bellies anytime soon. On second thought, if they did cut taxes we may eat more bacon…
Someone asked us the other day, “Will this ever get better again”? The simple answer is yes. The dramatic answer is absolutely. Often times, during investment distress, at or near inflection points, the forward looking vision becomes most blurred, and investors forget about economic realities. As we approach the Christmas season, we ask the question, “Will shoppers just stop buying gifts for their kids?” Likely not. Could they slow down or scale back on their spending? Absolutely. Consumerism ebbs and flows, as do global economies. Things change constantly. Today they seem to change faster than ever. Yet do economies stop and does the world give up? Absolutely not. Human nature is reflected into global equity markets every minute of every day. We know fear is a stronger emotion than greed. We have learned that for long term investment success, we avoid using emotions to determine the construct of investment strategies, and to stick with a proven discipline.
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