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Finances: The more things change…

Finances: The more things change…

by Arnold Machel, CFP®

 

“So be careful to live your life wisely, not foolishly.  Take advantage of every opportunity because these are evil times.”   Ephesians 5:15-16 (NIV)

 

At the time of writing, it’s been nine weeks since we started this physical distancing thing. So much has changed. I’m working from home. I don’t eat out. I hardly see my kids in person. I get together with my friends infrequently. And when I’m with either, I treat them like they’re a leper, not touching and maintaining a distance. I watch church on TV now, rather than participating in a live event, greeting friends and acquaintances and getting to know newcomers.

But to be fair, much has stayed the same. I’m still working. I still pick up meals once in a while. I still have the same friends and family and we still touch base regularly. I still ‘attend’ the same church, listen to the same music and support the same causes. Life is different for sure in some ways, but in others it has many similarities.

Bear markets (defined as a 20 percent drop) are as common as dirt. On average, they have occurred once every five years and while each time the trigger is different, there are remarkable similarities in how they behave. The cause may be different, but the behaviour is the same. Just like life, some things are different, but some are the same.

The most common question I’ve been getting these days is: “When will the markets bounce back?”  I’m afraid you probably won’t like my (partially tongue-in-cheek) full answer: 1 – “they already have to some extent” and 2 – “I don’t know. Some time in the future.”

Regarding my first answer, just take a look at the article here  in the Light Magazine two issues ago (April) where I wrote “At the time of writing the Dow is around 21,200.”  Right now, at the time of writing this June article, it’s around 24,500 for a bounce of over 15 percent already. If we managed to hit it smack dab at the bottom of the trough, we’d be looking at a bottom on March 23 of 18,592. That translates into a whopping 31.8 percent recovery. So, I repeat, 1 – markets have already bounced back to some extent.

Regarding the second response, the reality is that I can’t predict the future any better than anyone else, but I can at least give some guidance. If history is any guide – and it’s the only guide we have – it’s likely we’ll be looking good sometime next year.

Historically, other than the Great Depression in the late 1920s, we see bear markets last from six months to two years. The time to recovery – to reach the previous market high – can be as little as 9 or 10 months for shorter bear markets and as long as three or four years depending on how far and how fast the ensuing bull market runs. Over the past 75 years, bear markets have averaged 13 months in length – a stark contrast to bull markets which have averaged roughly nine times longer at 119 months in length.

Furthermore, generally bear markets caused by exogenous events (SARS or 9/11, as an example) have tended to be the ones to recover quicker and those caused by a financial crisis (2008/9 is still fresh in most of our minds) have tended to be of the longer lasting variety.

We entered bear market territory during the week of March 16, with the fastest drop since 1929 and at this point it would appear that we bottomed out a week later on March 23. Since then, we’ve had a rapid, partial recovery and while I can’t say that we are definitively out of the woods yet, the signs are good. To me, it would appear that this will be one of the shorter varieties. Like SARS and 9/11, the bear market was due to something outside the financial system, suggesting that it will be the shorter type. That would imply hitting new highs some time 9 or 10 months after March 16 putting us into December or January of next year.

But that’s all conjecture. Frankly, it will take clear signs that a safe vaccine or treatment is imminent, before we start reaching new highs again. Interestingly, the likely timeline on that is similar. By the time a vaccine or treatment is tested and has completed all the approvals necessary, and then been manufactured, we’re probably talking next year at the earliest before it’s readily available.

So, my guess (and it is really just a guess) is that markets (and consequently your RRSPs, TFSAs, etc.) are likely to consolidate, trading in a range close to where they are now for the next three to six months and then, as news of vaccines and treatments become more and more definitive, start to trend upwards until finally starting the next bull run.

Reiterating what I wrote two months ago…

  • Do what you can to add to your portfolios. If history teaches us anything, it’s that now is a great time to take that money sitting idle in the bank and invest it.
  • Consider adjusting your asset allocation to take advantage of the current conditions by increasing your allocation to equities.

Bear markets are simply a sale on securities that you were probably going to buy at a higher price later on. Why not get them while they’re on sale now? The best sale was on March 23 of this year. That sale ended though and there are no rain cheques. They may not have quite the same discount, but they are still on sale. Don’t miss out this time.

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca.  Please note that all comments are of a general nature and should not be relied upon as individual advice.  The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed.

 

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