This would be the headline today if the ‘normal’ path of vaccine development had played out. While I am guessing on the response from investors and stock markets, I think it’s a good guess that stock markets would offer significant corrections if we knew that we would be in the grip of the first modern day pandemic for many more years. Face it, we got lucky. While we are certainly not out of this, we might get to the other side of the pandemic this year or next, thanks to the creation of very successful vaccines that is nothing short of a miracle.
The what ifs.
What if there was no miracle vaccine? What if there was no do-anything, spend anything (do whatever it takes) response from central banks and government agencies? Where would we be today? The headlines would be much different, compared to this.
How’s this for hindsight?
That headline was written in April of 2021, after the vaccine development and the reasonably successful early innings of vaccine delivery and inoculation.
The headline is penned after stock markets delivered the most aggressive surge (ever) after a sizable stock market correction.
It is all hindsight. It was more probable that …
- We would have no vaccine in 2021.
- Stock markets would be tanking or facing serious corrections.
With no vaccines, the world would be in the first or second inning of the pandemic. Even though, today, we feel the weight of lockdowns and the pandemic, we would feel much worse if we knew there was three more years, or four more years, before we even get a glimpse of the other side.
It would be difficult to find optimism.
I’m sorry, it was different this time.
This is and was a global health crisis, the first modern day pandemic. This WAS NOT a financial crisis such as the silliness created by the collateralized debt obligations (the financials weapons of mass destruction) that offered up the Great Financial Crisis.
This was not the dotcom bust of the early 2000’s, caused by severe speculation that drove US tech stocks to silly valuations. This was not the stagflation period of the 1970’s and early 80s that was created by oil wars and confused politicians.
This is and was a war. It is a global health emergency.
Take the miracle vaccines out of the picture, and we write a different headline. Vaccines usually take several years to develop. Developing very successful (efficacious) vaccines within months is one of the great miracles of modern science.
It was not business as usual.
I was one of the very first in the financial space to write on the pandemic. Those spike proteins were a distant consideration for most when I wrote this on February 1 of 2020.
Cases were just arriving North America, and certainly I had no idea that the pandemic would spread, to then grip and shake the world. But shake it did.
Who knew it would become a global pandemic and surpass all of these viral threats?
The pandemic picked up speed, scared the crap out of us, and took down the stock markets. It was the most swift and violent stock market correction we had ever seen. And of course, full of panic, investors called their advisors.
From that Globe and Mail article.
March was particularly crazy,” said Colin Cieszynski, chief market strategist at SIA Wealth Management. “It was hard to get a read on anything because markets were gyrating so much. Forget about day to day, from hour to hour.”
Unprecedented moves by global central banks to cut interest rates to rock-bottom levels and subsequent fiscal stimulus prevented a depression and provided needed support for the rebound and very lucrative market conditions that currently exist.
Investors were not expecting that type of unprecedented policy response, said Ms. Bangsund.
“The timing and the magnitude of the support completely exceeded expectations and has been a key source of that upswing that we saw through 2020.” By August of 2020, markets were well into rebound territory.
Of course, we now know that US stocks and Canadian stocks and International stocks have gone on to deliver all-time highs. Who knew that a global pandemic was the best thing that could happen for stock markets, and investors?
Here’s the comment that I left on the Globe post.
Everything is hindsight. At the time we did not know what would happen. It could have been a pandemic that wiped out 10% of the planet, or more. We still do not know that ending.
We could have had a depression when stocks would earn nothing for a decade or more. Well, we are in a depression, but it is suppressed by low rates and government support.
Stock and bond markets were saved by governments and central banks that provided astronomical levels of support never seen before. That continues.
A good “call” on investing in financial assets was a bet on the level of government support – good guess, I guess.
There was miracle vaccine development (another story that we only know today, in hindsight). Vaccines usually take 5 years or more to develop. What would the world (and markets be like) if we were under ‘normal’ vaccine delivery timelines? We would have no optimism today.
The US would still have 3,000 or 4,000 citizens or more dying every day. Take that event around the Globe.
With no vaccine we would have to let a lot of people die to build natural herd immunity, or stay at home and go bankrupt with required levels of government support.
Wow, looks like I was in a cheery mood that day, ha 🙂 But I don’t think I was exaggerating, much or at all. I take this risk stuff quite seriously, can you tell?
We did not know what the future might hold from February and March of 2020, and we do not know the future today.
But here is the typical hindsight response we see repeated or printed in 2021 with stock markets at new highs. From that Globe post …
But Mr. Small believes, as Ms. Bangsund, said, that some Canadian investors missed out on the recovery by bailing out too soon or moving to defensive positions.
“I think those that bailed fully … were sorry they did. Those that hung into the market, obviously they were rewarded for doing so.”
Mr. Small said he was able to convince all of his clients to at a minimum stay the course, while many increased their investments.
“All my clients were happy they did and for those that added, they were even happier.”
Mr. Small is a senior investment adviser at IA Private Wealth. Ms. Bangsund a portfolio manager for Fiera Capital. Of course, they would not be writing those words in 2021 if there was no vaccine.
And then Eric Lascelles, chief economist at RBC Global Asset Management adds this to wrap things up in that article.
While a market rebound well in advance of the underlying economy is normal, the degree of enthusiasm was unusual so soon after a recession, he said.
“We expect further rapid growth over the next few years, and ultimately little scarring,” Mr. Lascelles said, adding that while valuations are high by historical standards, they are attractive compared with the ultra low-yield bond market.
“In other words, the risk premium enjoyed by equity-holders remains sufficiently large to make current valuations tolerable and likely sustainable.”
Phew, glad that’s all settled. The coast is clear.
Though Larry Bates the author of Beat The Bank offered this on Twitter.
Yes, the risks remain.
Were you prepared for ‘the worst?’
It’s not that “of course stock markets will always recover”.
Stock markets can enter periods when they deliver no real returns for several years or a decade, or more. The traditional stock and bond balanced portfolio can fail for extended periods, take the stagflation era for instance. See the Great Depression as well.
The proper investor education is that ‘I have no idea what will happen, but your portfolio is ready for whatever comes next’. We are always prepared.
Here’s an exercise. What portfolio would you design today if you could admit that you do not know the future? If you need to protect wealth, what portfolio would you build if you thought stagflation or prolonged economic contraction with crippling unemployment was a possibility?
Of course we stay the course.
We can and should stay the course if we are prepared for anything. We also need to ensure that our portfolio matches our tolerance for risk. And perhaps for the advisors who contributed to the Globe article, that is the case; their clients were well coached and the portfolios and investment plan was ready for anything. No matter what happened, the clients were more than likely to reach their long term goals.
That said, my conversations with advisors and planners clearly lead to the conclusion that most do not prepare for these black swan events or a once in a lifetime financial crisis.
Most scoff at the suggestion of stagflation, or anything but long term economic growth. That is recency bias. All we have know for most of the last 40 years or more is modest economic growth in a disinflationary environment, when stocks and bonds typically perform well.
Ask your advisor if they know the future. The self-directed investor might check to see if their portfolio is ready – for anything.
On ‘ready for anything’ you might have a read of The Permanent Portfolio. While we can improve upon that investment approach, that portfolio demonstrates how certain types of assets work in different economic environments.
Also, have a read of The New Balanced Portfolio.
All said, if you are early in the accumulation stage with decades to go, you may not face the same risks as a retiree or near retiree. Consider your time horizon, consider the risks that apply to your time horizon and greater financial plan.
And stop guessing, perhaps.
Thanks for reading, we’ll see you in the comment section.
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