The Globe and Mail - 13.03.2020

FRIDAY, MARCH 13, 2020| THEGLOBEANDMAILO B7

GLOBEINVESTOR

REPORTONBUSINESS|

W

e have to acknowledge
the short-term pain felt
by long-term investors
when financial markets tank.
You can’t explain away the
stress of daily stock market
plunges by telling people to keep
a long-term perspective. The anx-
iety felt in the current market up-
heaval is all the more intense be-
cause it was triggered by a virus
that is spreading quickly around
theworld.Stressiscominginster-
eo these days.
But let’s look at some things
you can do to limit financial
stress. One is to stop endlessly
checking what the stock markets
are doing. A rapidly plunging
market sends a message of crisis.
Spare yourself. Check in once a
day or less, and remember what
has happened in previous stock
market declines. Stocks find a
bottom and then rally. The mar-
ket does not go to zero. It bends,

but never breaks.

Also, stop checking your port-

folio online all the time. Current

losses are no more indicative of

your results than the peak of the

market numbers you were look-

ing at a month or two ago.

Another tip is to not equate

what the major stock indexes are

doing with what’s happening in

your own investment portfolio.

Bonds are soaring in prices these

days as stocks fall. You’re still los-

ing money if you have 40 per cent

ofyourportfolioinbonds,butthe

damage isn’t as severe as if you

were 100-per-cent exposed to

stocks.

One more tip is to focus on de-

velopments that can actually

help your personal finances. Fall-

ing interest rates are a sign of

stress in the economy and con-

cern about a recession. But they

also mean a lighter interest bur-

denonpeoplecarryingdebts.The

interest rate on your home-equi-

ty line of credit, variable-rate

mortgage or both should have

fallen 0.5 of a percentage point as

a result of an interest rate cut by

the Bank of Canada last week.

More cuts could be coming.

If you have a mortgage coming

up for renewal or need to

refinance your mortgage, falling

rates will save you money. Lower

interest rates have sent the mort-

gage industry into a frenzy, as

homeowners and buyers race to

take advantage of cheaper loans.

Gasoline prices are falling as a

result of a big decline in the price

of oil, which is bad news for the

financesoftheentirecountryand

not just energy-producing prov-

inces. But lower gas prices do

lighten the load on financially

stressed households. GasBuddy-

.com says the average price of a

litre of gas across the country has

fallen about 7 per cent in the past

month.

The daily flow of bad financial

newswillcontinueawhilelonger.

Find your zen in the short term

andrememberthatthelong-term

view on your investments is al-

ways better (really).

Findingyourzenasfinancialmarketsburn

Youcan’texplainaway

thestressofdailystock

marketplunges–but

youcantrytolimitit

ROB
CARRICK

OPINION

GETTYIMAGES

Focuson

developments

thatcanactually

helpyourpersonal

finances.

W

e have the makings of a significant bear market,

and it’s just starting. The Dow has made the

fastest switch from bull to bear market on re-

cord, just 19 sessions, since the 42 days follow-

ing the September, 1929, peak. On average, it takes 136 days

to go from bull market peak to onset of the bear – to show

how fast this has happened.

Time now to put things into perspective. As we write the

obituary on the March, 2009-March, 2020, bull market, we

will say that it was a bull run that was twice as long as what

is normal by historical standards, and that the total return

was 400 per cent even in the face of the weakest economic

expansion in history.

Then again, this tells you just how far this bear market

may have to go to unwind all the froth that the prior bull

market condition generated – especially since so much of

the rally was premised on financial engineering, such as the

greatest debt-for-equity swap in history that made the share

buyback craze the leading source of demand for the entire

cycle, not to mention the mountain of leverage and the

proliferation of exchange-traded funds and private equity-

to-debt involvement that has accentuated market illiquid-

ity.

The pundits telling you not to worry because the U.S.

banks are in good shape aren’t telling you that the holders

of the dubious debt from hedge funds to pension funds to

mutual funds to insurance companies are in far worse

shape.

We had recessions in 1990-91

and 2001 that didn’t involve the

banks – they aren’t always the

culprit and it makes no sense for

us to fight the last war (although

the record US$2.4-trillion of du-

bious commercial and industrial

loans on bank balance sheets

will be tested nonetheless).

On Wednesday night, U.S.

President Donald Trump lis-

tened to his instincts and played

the blame game and opted to

ban travel to and from Europe for 30 days.

This will accomplish little else but drive a further nail

into the recession coffin, especially in the airline, travel and

energy industries.

Labelling this a “foreign virus” has a certain connotation

to it – not to mention the move to suspend the entry of

most foreign nationals who have been in any of the 26

European Union countries in the past two weeks.

Draconian, indeed, and it is a panic reaction like this that

breeds panic among the public.

I’m sensing that what markets (and people) would rather

hear is a plan to address the lack of testing kits across the

United States.

The bizarre remarks and actions, the lack of prepared-

ness and adequate response, the news that the NBA, NHL

and Major League Baseball are suspending their seasons,

and even Tom Hanks contracting the illness, have all con-

spired to send global stock markets into further tailspins.

Most are now in bear territory.

Congress also resisted the White House recommendation

to scrap the payroll tax – as if that would accomplish very

much, in any event (except remove funding for Social Secu-

rity and Medicare ... but who cares about those, right?).

Italy has locked down the entire economy outside of gro-

cery stores and pharmacies. Total lockdown. Italy is seeking

US$5-billion of International Monetary Fund assistance.

This is otherwise known as a meltdown and, as I’ve been

saying for a while now, this has a 1987 feel to it.

There are falling knives everywhere and now recession

reality bumps up against a complete lack of earnings visibil-

ity and the most leveraged corporate balance sheet ever

witnessed.

Special to The Globe and Mail

Asignificantbearmarket

isjuststarting–andithas

adistinctly1987feeltoit

DAVID

ROSENBERG

OPINION

INSIDETHEMARKET

Aswewritethe

obituaryonthe

March,2009-March,

2020,bullmarket,

wewillsaythatit

wasabullrunthat

wastwiceaslongas

whatisnormalby

historicalstandards.

W

hen the going gets tough
for stocks, bonds take
the edge off.
This basic rule of investing has
been validated yet again in the re-
cent stock-market decline. The
dividend stocks and preferred
shares some investors have used
as a higher-yielding substitute for
bonds have provided little com-
fort.
The S&P/TSX composite index
lost 5.9 per cent on a total return
basis (share price changes plus
dividends) in February, the
month in which the recent mar-
ket decline really started to bite.
For the first two months of the
year, the index was down 4.2 per
cent. Meantime, the FTSE Canada
Universe Bond Index gained 0.7

in February and was up 3.6 per

cent for the year to date. With

stocks falling, money flowed into

bonds and generated some de-

cent total returns for bonds (in-

terest plus changes in price).

Stocks fall, bonds rise. We’ve

seen it over and over. Now, what

about the bond substitutes, divi-

dend-paying common shares

and preferred shares?

Preferred shares have been on

the defensive for a while now,

and early 2020 offered more of

the same. The S&P/TSX Preferred

Share Index was down 3.4 per

cent for both February and the

year to date. The Solactive Lad-

dered Canadian Preferred Share

Index, a benchmark for rate-reset

preferred shares, lost 4.1 per cent

in February and was down 4.3 per

cent for the year to date. Dividend

stocks had a rough February, as

judged by the 6.3-per-cent loss for

the S&P/TSX Canadian Dividend

Aristocrats Index (it lost 4.2 per

cent over the first two months).

Hold dividend stocks as equi-

ties for sure, particularly divi-

dend growth stocks. But as a sub-

stitute for the stabilizing influen-

ce of bonds, they’re a fail. The

same applies doubly for pre-

ferred shares, which could be to-

day’s twitchiest, most high-

strung asset class.

Most preferred shares are rate

resets, which have their dividend

changed every five years to re-

flect changes in five-year Govern-

ment of Canada bond yields.

Five-year Canada bond yields

have recently fallen to a bit above

their record low at 0.5 per cent in

early March, which presents the

risk that some rate-reset pre-

ferreds will be reset to provide

lower yields.

Hold preferred shares for tax-

advantaged dividend income in

non-registered accounts, not as a

substitute for bonds. They’re aw-

ful for that.

Nowweseewhypreferredsharesand

dividendstockscan’tsubstituteforbonds

ROB CARRICK
PERSONALFINANCECOLUMNIST

INSIDETHEMARKET

The S&P 500 rebounded only
briefly after the announcement,
then ended the day down 260.74
points – its worst one-day slide
since 1987 and deepening a rout
that began three weeks ago.
The index has fallen a total of
26.7 per cent since Feb. 19, for its
quickest descent into bear mar-
ket territory in at least 75 years as
markets reflect concerns that
companies could run out of cash
before the pandemic ends. Cana-
da’s stock index has fallen about
30 per cent from its recent high
on Feb. 20.
“If credit flows are disrupted
or shut down, then within a few
days the real economy is going to
start seizing up. You’ll see lay-
offs, businesses really cut back
on investment. It’ll be very diffi-
cult on the real economy,” Mark
Zandi, chief economist at
Moody’s Analytics, said in an in-
terview.
The tremendous market vola-
tility is happening while yields
on high-rated corporate bonds
are rising, suggesting that inves-
tors are recoiling from risk as
corporate profit expectations
implode and some blue-chip
companies seek infusions of
cash.
Reuters reported on Wednes-
day that Boeing Co. will draw
down the full amount on a
US$13.8-billion loan.
The aerospace company, al-
ready struggling with the
grounding of its 737 MAX jets,
has seen its share price fall 51 per
cent since Feb. 12.
More troubling, ultrasafe U.S.
government bonds, usually go-to
havens when stocks are freefall-

ing, took a turn for the worse this

week amid concerns that trading

activity is drying up–alackof

liquidity that the Fed is now try-

ing to address.

During Wednesday’s market

mayhem, the yield on the 30-

year U.S. Treasury bond in-

creased by 0.11 percentage points

as bond prices fell, an unusual

move given that bonds should

have been in high demand when

the S&P 500 cratered 5 per cent

by the end of the day.

Such moves have some ob-

servers worried.

“The U.S. Treasury market is

the bedrock for all other finan-

cial markets; it is the world’s risk

free rate and allows the U.S. gov-

ernment to fund itself. If the U.S.

Treasury market experiences

large-scale illiquidity it will be

difficult for other markets to

price effectively and could lead

to large scale position liquida-

tions elsewhere,” Mark Cabana, a

strategist at Bank of America,

said in a note released on Thurs-

day morning.

The problem is appearing well

beyond U.S. markets. Chris Cock-

eram, associate portfolio manag-

er at Ninepoint Partners in To-

ronto, said that he sold German

government long-dated debt,

known as bunds, on Thursday

morning. The transaction, which

would normally take about 10

seconds took 15 minutes, reflect-

ing the turbulence in credit mar-

kets.

Among corporate bonds,

yields are widening relative to

safe government debt, creating

spreads that are particularly

wide in the case of debt issued

by energy companies that are

struggling with low oil prices.

Even some high quality bonds

aren’t trading hands in an open

market but by appointment –

where a specific buyer and seller

must arrange a deal.

“It’s getting pretty messy,” Mr.

Cockeram said in an interview.

“To be trading by appointment

on bank bonds and higher qual-

ity names is not normal, for

sure.”

Authorities worldwide are try-

ing to stanch the spread of the

coronavirus.

Central banks in the United

States, Canada and the U.K. have

cut their key interest rates in an

attempt to stimulate economic

activity.

Italy has essentially locked

down its entire population and

closed most stores. And the Unit-

ed States is imposing a 30-day

travel ban on flights from main-

land Europe.

The National Basketball

Association has suspended the

rest of its season, the National

Hockey League suspended

operations and Major League

Baseball has delayed its opening

day.

With a report from Matt Lundy

Markets:Marketvolatilityishappeningwhile

yieldsonhigh-ratedcorporatebondsarerising

FROM B1

It’sgettingpretty

messy.Tobetradingby

appointmentonbank

bondsandhigher

qualitynamesisnot

normal,forsure.

CHRIS COCKERAM

ASSOCIATEPORTFOLIOMANAGER

ATNINEPOINTPARTNERS