As if 2020 couldn’t get any crazier. The world was basically shut down due to a global pandemic, kids worldwide not attending in-person school, a hot button US election with the chances of the incumbent president likely to reject the results if he loses and now the US President contracts COVID-19 along with the First Lady and many of his closest advisors. Kids are only starting to return to school and it is estimated that near half of the restaurants in North America will not survive the rest of the year.
I want to share a chart that outlines the reflection of this volatility in market terms. I’ve compared the 2019 January 1 to September 30 percent daily price changes in the S&P 500 to the same time period but in 2020.
A couple of things to point out:
- The magnitude of the changes in March and April of 2020 as denoted by the blue line. There were upwards of near 10% daily moves in both directions. Note that the daily percent change of the red line, which is the 2019 data, never went anywhere near 5% in either direction all year.
- I would like to draw your attention to the red 2019 line in August compared to the blue 2020 line in September. September felt drastic to many however this indicates that September was well within somewhat normal ranges for daily moves when making year over year comparisons.
Blue line = 2020; Red line = 2019
While the beginning of September 2020 saw a pretty significant pullback it was still a healthy and expected move. Things seem to have stabilized however there are expectations of more volatility heading into November of an election year.
Let’s compare September’s return in between the various Canadian and US indices.
|Sep. 2020||Aug & Sep 2020: Two Month Return|
While the TSX faired better than the US S&P 500 and NASDAQ in September, remember that there the US S&P 500 up 7.0% and NASDAQ up 9.6% while the TSX was up only 2.1% in August.
That’s a 0.33% 2 month return for the TSX with 2.82% and 3.94% 2 month returns for the S&P 500 and NASDAQ respectively.
This goes back to having a solid understanding of your reason for being invested. Has the investment thesis changed because of the economics or is this just headline noise?
Remember to first always protect your cash flows which is your required spending. This allows us to sleep better at night knowing that our incomes are protected. Next, understand the economics and what affects those economics.
Do you invest in people or companies?
Let’s look at Disney who has recently laid off 28,000 furloughed employees. Disney was paying for benefits and other costs by keeping these employees on the books. While the loss of jobs for this many people is extremely tragic, remember that your money is invested in the company and not the people. The company is trying to reduce costs and protect profits. They want to keep these people on board but they will only do so if the ticket sales and revenue can support them.
While there will be some loss of productivity in the economy, the loss of jobs is not a 1:1 loss of revenue for Disney.
They cut expenses and this helps to protect net income.
Stocks are valued off of net income and other metrics. If their net income can be improved even though they are letting go of employees then the value of their stock should go up. This is a negative because they don’t see the return to business levels in the parks that they previously had however they are doing what they can to increase shareholder value.
This is why there is a big disconnect between what we see going on around us and the stock market. Companies cut costs (employee payroll) and this helps them protect profits and hence help their valuations. Meanwhile we are hearing about all these people being laid off and the loss of income. Assuming that we aren’t in a depression those people will be forced to find other jobs and will eventually return to the workforce and produce incomes which can then be spent on goods and services in the economy.
Many companies are protecting their profits by reducing costs and I expect this to pick up speed when 2021 begins. Many companies have social pledges to not cut jobs during the pandemic however this will only last so long.
The moral of the story is that portfolios are composed of companies and not people. Companies quickly cut costs and try to improve profits while people lose incomes and have a hard time cutting costs to offset.
This is one of the reasons why the stock market will rise when many people are being laid off and great uncertainty remains around the economy.
Until next time,
Trevor Dale, CFA
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