Holy crap

“Did you know-it-all Bay Street people see this one coming?” Jen taunted me in a Friday morning email. “This is why you’re all crooks, selling dreams. I’m sticking with my GICs that you love to mock.” And with that, she harrumphed off into my inbox.

So Wall Street laid an egg at the end of the week. In fact markets everywhere sold off. Toronto, New York, Emerging markets. Oil. Even Bitcoin. Bonds went up for a while as stocks went down. Everybody woke up, looked at the chart below, and decided to retreat for the weekend. The new version of the slimy little pathogen emerged in South Africa. It looks nasty, contagious and nobody yet knows if it will laugh in the face of Pfizer.

The fear is simple. Covid comes back stronger. Longer. The global economic recovery’s delayed or derailed. Central banks are thrown into a quandary. Do they raise rates to quell inflation that’s running way too hot and disrupting society, or keep them low to defend against this B.1.1529 thingy? After all, they can’t do both. And in Canada we are very, very, very close to the bankers shifting gears. Already they ended their simulative bond-buying and indicated the first rate hike is 20 weeks away.

Or, maybe the variant is just the last straw leading us into a healthy, overdue and welcome correction. Markets which don’t stop to catch their breath can get into trouble. When prices detach from fundamentals, a pullback is required. And yes, Jen, nothing goes up forever.

How much does this matter? Enough to flee to the serene torpor of a 2% GIC? After a one-year 30% gain as post-virus optimism built, have stocks (like houses) reached a point where a crash is inevitable?

History helps.

Over the last 20 years there was some serious, scary bloodletting in equities. In 2001-2 we had the dot-com-bust bear market. Markets gave up 45%. Then there was the 2007-9 credit crisis when US real estate collapsed and took Wall Street investment banks with it. Stocks plopped 53%. And Covid crashed hard in 2020 for the fastest bear market ever. Down 35%.

Despite that, someone who invested in US equities two decades ago, then went to sleep, has seen a 9.48% average annual return. In total over this time, stocks gained 507% (far more than any real estate market in Canada). Even factoring in inflation and taxes (if assets were held in a non-registered account), equity investors were winners.

Now let’s look at Jen’s choice.

Below are the returns for GICs over the last three decades. After inflation, the return on a one-year guaranteed investment certificate has been negative almost single year since 2000. Savings stuffed there were not protected. They were whacked. Two decades later those savers came away owning less than they started with in terms of purchasing power. The safety was an illusion. And so was the myth of preservation of capital.

Click to enlarge.

What happens now?

No idea. Maybe this variant is the real deal and will defeat the vaccines. Then more will be found. Maybe it’s just a reason to sell off stocks and take profits after a huge runup because of the inevitability of rising rates and the end of CB stimulus. Perhaps it’s just people rebalancing and harvesting gains.

Whatever. It’s immaterial. History tells us such events are irrelevant. Predictable, almost. And Jen is succumbing to emotion. She fails to understand the true nature of risk. As we’ve oft said, the greatest threat is running out of money, not losing it in an asset that plops. Especially for women. Especially in GICs.

The average bear market (when values fall at least 20%) lasts 280 days. The average bull market lasts about 1,000 days. Stock markets are a proxy for the economy. If there is growth, population expansion, hiring or tech progress (all happening), markets reflect this.

But shocks come. They may be short, but they’re impactful. Volatility can spike. This is precisely why a balanced and diversified portfolio works. It holds assets that are safe and likely to rise when stocks fall, as well as growth assets giving long-term results. There’s also a variety of stuff – from boring bonds to hybrid preferreds, to commercial real estate to corporate debt to near-cash securities and stock indices around the world.

Set it. Forget it. Rebalance occasionally. Stuff your tax shelters. Turn off BNN and turn on Hudson and Rex. Chill.

Panic is so 2020.

About the picture: “These are my 2 dogs,” writes Ken, “Spencer in the left who I adopted at 20 months old and Sopie who I got as a pup. He is 8 now, she 5. Honestly they are the 2 nicest people I know.”