written Tuesday morning, August 6, 2024 by Chris Raper CIM, CFP® Co-Founder, Wealth Advisor, Portfolio Manager & Cross-Border Specialist
Market Downdraft: Problem or Opportunity? It Is All About One’s Behaviour.
- The panic of 2024 compared to 2008 and 2020
- Aspira Wealth strategies have cash to deploy or are relatively immune
- There are multiple positives to keep in mind
- Looking forward – there are many attractive non-AI related companies
The panic of 2024 compared to 2008 and 2020
As I write this morning, the CNN Fear Greed Index is at Extreme Fear. Yesterday (Aug 5/2024), while most Canadians were enjoying a provincial holiday, the Volatility Index spiked to a high of 65, levels that we have not seen since the Covid induced panic of 2020 and the collapse of the real estate bubble in 2008. Suffice to say, a lot of investors are in panic mode – we are not. We are biased to our adage, panics are for buying, not selling.
Chart courtesy of StockCharts.com
So how did we make it through 2008 and 2020? We did it by sticking with the program. Down markets, while not fun, are the price we pay for the outsized returns in equities over bonds. Owners do better than lenders over long periods of time. Furthermore, if that equation doesn’t hold true, who will repay the lenders?
The investors who gave into their emotions during 2008 and 2020, sold their equities, were faced with two unnerving prospects – they lost their chance to recover and then were faced with the “when to get back in” dilemma. I have been in this business for the last 30 years and have never witnessed a successful outcome of such behaviour. Does history repeat itself? No, but it often rhymes.
What’s different this time? If you are a reader of our missives, you will know that we have been concerned for some time regarding the over concentration of mega cap stocks. The top ten stocks of the S&P 500 as at Jun 30/2024 made up 36% of that index , a number we have not seen since 1972. Investors have poured money into Artificial Intelligence (AI)themed stocks – principally Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia - and the one thing they have in common is the amount of money they are willing to spend on AI chips that as of now, only Nvidia can supply. Overinvestment in any sector ends with the bubble bursting – recall the dot.com era, the $150 oil commodities boom of 2008, and the stay-at-home stocks of 2020, epitomized by Peloton that peaked north of $170 and trades at $3 today.
Chart courtesy of StockCharts.com
The thing that characterizes all of those eras is that the stocks/sectors that outperformed after the bubble burst were not the high flying stocks of the bubble, rather the areas that had been underinvested for years, i.e. post dot.com, commodities were the place to be; post $150.00 oil, technology was the place to be; post 2020, it was anything but stay at home stocks.
Aspira Wealth strategies have cash to deploy or are relatively immune
While we are not unscathed here at Aspira, we do believe we are well positioned. Our core equity strategy, The Dividend Value Discipline™, entered the month with unusually high amount of cash, roughly 10%, so we have some dry powder to take advantage of the opportunities in the days ahead. The Keep More Income strategy, is well diversified, all Canadian and continues to pay us great rent cheques – the dividends, all of which qualify for the Canadian Dividend Tax Credit. The Next Cycle Resource Fund, while hit hard, is still up double digit on a year-to-date basis. We see this sector as long suffering from underinvestment, aka long-term opportunity. Our most conservative strategy, The Fixed Income Cheap and Cheerful is benefiting from lower rates as we locked up a lot of bonds late last year when 5ish % yields were available.
There are multiple positives to keep in mind
- Interest rates are already off significantly. The world’s benchmark bond yield dropped from a high of 5% to 3.90% at time of writing.
Chart courtesy of StockCharts.com
Perhaps more importantly, the yield curve is no longer inverted - negative yield curves point to a recession, where has positive sloping curves point to expansion. This implies we have been in recession and anecdotally we have seen many sectors where that is true.
Chart courtesy of StockCharts.com
- There are lots of great companies to invest in – the outperformance of the AI themed stocks has thrown a lot of great companies under the bus – the number of stocks within the S&P 500 outperforming the index is still sub 35% - levels that we have not seen since 1989/99.
- Yesterday’s US ISM Services Index pegged in at 51.4, which denotes expansion. Recall that services make up 70%+ of U.S. GDP. The contrary point is that the US ISM Manufacturing Index is now sitting at year-to-date lows. That said, the Industrial Sector has held up well during this vortex and appears to have bottomed in early July. Equities are a forward-looking animal.
Chart courtesy of StockCharts.com
Looking Forward – there are many attractive non-AI related companies.
So, what do we see in the weeks/months ahead? It appears to us that Artificial Intelligence (AI) has peaked. I believe the image of NVidia’s CEO, Jesen Huang, signing a fan’s bra at a recent tech conference will soon appear on a Time Magazine cover and will be seen as the top of AI investor frenzy. We see this unwinding as investors recognize that capitalism has a way of eroding Nvidia’s 75% gross margins. We are biased towards looking elsewhere and, whether this process takes weeks or months, please rest assured that we will buy and sell at the same time and the same price, right alongside you.
What we can say we a high degree of certainty is there are many non-AI related companies that are trading at attractive valuations and unlike recent years when interest rates were essentially zero, fixed income is a viable option for the conservative investor. As always, the objective for the money rules the investment decision – bonds for short term security – equites for long term security. Please reach out if you wish to further unpack and please turn over the couch and find some fresh investment $’s if you can 😊.
One behalf of the entire team here at Aspira, we hope you are having a great summer and taking some time with the ones you love.
-Chris
The information contained in this report was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views expressed are those of the author and not necessarily those of Raymond James. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. This provides links to other Internet sites for the convenience of users. Raymond James Ltd./Raymond James (USA) Ltd is not responsible for the availability or content of these external sites, nor does Raymond James Ltd/Raymond James (USA) Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd/Raymond James (USA) Ltd adheres to. Raymond James Ltd., Member—Canadian Investor Protection Fund. Raymond James (USA) Ltd. (RJLU) advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered. Raymond James (USA) Ltd. is a member of FINRA/SIPC.
