As the week progresses, all indications are that we are in for another volatile one. However, I thought I would pass along some summary points from a call I just got off of with Jeff Guise, CIO Connor, Clark & Lunn Investments and Mike Flux, VP Connor, Clark & Lunn Private Capital.
The result of our call today would suggest that we are experiencing nothing more than some panic selling. Emotions are running very high again.
The following points lead us to one conclusion. If your investment objectives have not changed, there is no reason to make any adjustments to your portfolio as now is a time to be opportunistic, and not let emotions dictate your investment decisions.
The yield curve is not signaling a recession
- Since 1956, 10 out of 10 recessions have been predicted by a flat yield curve (ie: rising short rates)
- The yield curve is currently very steep (low short rates)
- This is a powerful incentive for businesses to invest and for banks to lend
- Banks are well capitalized and continue to lend
Consumers
- Oil has fallen back to $86. Gasoline prices will follow suit creating a powerful stimulus for the US economy
- Banks willingness to lend is improving
- Income gains are strong and have been improving for a few months now
- Income gains + oil stimulus + credit trends argue strongly for stabilization, not recession
Relative Value
- Bond yields are now at 2.5%
- S&P dividend yield is 2.13%, TSX dividend yield is 2.79%
- After tax equity yield exceeds bond yields by a wide margin
- Buying bonds today virtually guarantees after inflation capital losses (negative real return)
- Despite the greater volatility of equities they are far more attractive than bonds even with very modest capital gain expectations
- Bond yields are at risk of rising (even if they just normalize to 3.5%) implying capital loss potential.
Sentiment is extreme, in panic zone suggesting at a minimum a short term bounce
- VIX (a widely used Volatility Index) has spiked indicating a short term bounce (at least) is highly likely
Irrespective of your stage of life, whether you’re investing for growth or investing for income, a flight to safety (ie: moving to bonds) is very likely to be the start of a slippery slope to regret and frustration. Continue to keep diversified, continue to collect the dividends and interest provided through your equities and high yield bonds and don’t follow the emotional crowd. Let logic prevail.
I would like to thank Jeff Guise and Mike Flux for taking time out of their busy day and vacation to speak with me today.
