By Guest Blogger Doug Rowat
.
Michael Mann is a brilliant director.
I say this partly because his cinematography is often influenced by the incredible Canadian artist Alex Colville (see below). But I also say this because anyone who’s seen the iconic diner scene in Heat with Robert De Niro and Al Pacino knows that this is a director who can get the best from his actors.
Canadian art meets Hollywood
Source: Google Images
However, no director’s perfect and the uneven Miami Vice re-boot is proof of that. But there’s one scene in the movie that oddly reminds me of a key rule of investing. In a meeting with a drug trafficker (what else?), Sonny Crockett (played by Colin Farrell) threatens to set off a live grenade when the meeting goes awry. Eventually, Ricardo Tubbs (played by Jamie Foxx) argues that everyone can decide to splatter themselves against the wall, but “then ain’t nobody gonna make no money.” Tense nods of agreement. End scene.
It certainly wasn’t De Niro and Pacino, but I still appreciated Foxx’s practical outlook and have always taken the scene to represent a great investing lesson: focusing solely on worst possible outcomes means that you’ll never make a profit.
Right now, the forecasts for the coronavirus are loosely divided into three scenarios:
- Worst case. The global economy will be decimated by the virus with minimal recovery for years. The virus will mutate and the global health care community will ultimately fail to control it. Deaths will be in the millions. Essentially, the exploded-grenade option.
- Base case. The sheer amount of global stimulus will eventually intersect with a moderation in the global infection rate and, once this inflection point is reached, markets will rally (perhaps this is happening already). Progress in Italy, South Korea and particularly China, and even some of the hardest-hit US states, such as New York and New Jersey, lend evidence that the US will eventually contain the virus. There will be a gradual re-opening of the North American economy in early to mid-summer with something approaching a normal resumption of economic activity (with notable exceptions, such as a continued ban on large gatherings) by the third or fourth quarter. Equity markets will likely start pricing in this re-opening sooner. This is the pinning-the-grenade option.
- Best case. We’ll all inject ourselves with disinfectants, lie under tanning beds and the virus will be cleansed from our bodies. No one else will die or be infected and the US and global economies will soon resume their upward trajectories, preferably before the November presidential election. Ironically, this is also an exploded-grenade option (put down that bottle of Lysol).
If you’re an investor who assumes the worst-case scenario then the sensible course of action is a flight to safety. But here’s a sample look at some of the safe options at the moment, duration can be decided on based on your own estimate of crisis length:
What safe gets you in 2020
Source: Bloomberg, RBC. *posted rate. RBC is used as a rough proxy for the GICs of all the big banks. I don’t include durations longer than 2 years for GICs because banks, though extremely safe, can’t quite be equated to the government in terms of safety, especially over a long time horizon.
So, the average yield for all of the above is a whopping 0.47%. You earn basically nothing and then have the additional difficulty of correctly timing your way back into the market. Like almost all retail investors (and most professional money managers for that matter), your timing won’t be successful and markets will probably rally by 20% or more before you feel ‘comfortable’ getting reinvested. If you recently moved to the sidelines, ask yourself if this recent rally in the S&P 500 is tempting you to dip your toes back into the market? I bet it is, but again, too bad you already missed the 25-30% bounce.
So, you can certainly assume the worst case for the coronavirus and make a dramatic flight to safety with your entire portfolio. No one’s stopping you.
But then, most definitely, the person who ain’t making any money will be you.
_____________________________________________________
Finally, I’ve put a lot of emphasis on the health care sector in my previous blog posts and noted that it should be a part of everyone’s balanced and diversified portfolio. As it turns out, health care has done its job this year, almost completely recovering to its pre-crisis highs and outperforming the broader S&P 500. Sometimes good defense turns into good offense.
S&P Health Care Index (white line) vs the S&P 500 (orange) – 1 year
Source: Bloomberg
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.