One portfolio manager says the broader equity markets could see a 20 to 30 per cent decline from end-of-February levels over the next nine to 18 months.BRENDAN MCDERMID/Reuters
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Fears of another financial crisis caused by turmoil in the U.S. banking sector have rattled investors, sending stock and bond markets on yet another wild ride.
Investors are now fixated on whether the U.S. Federal Reserve Board will continue to hike rates at its meeting next week to try to stem stubborn inflation or pause amid the banking crisis that continues to unfold. The decision could have wide-sweeping implications for the markets and the economy, including whether we’ll see a deeper downturn or an official recession.
Globe Advisor spoke with several Canadian money managers about where they think we’re in the current bear market, how it compares to historical downturns, and how they’re positioning their portfolios in response.
David Rosenberg, founder and president, Rosenberg Research & Associates Inc. in Toronto
Mr. Rosenberg believes we’re at about the halfway point of the bear market in terms of magnitude and duration.
“The S&P 500 typically bottoms 70 per cent of the way into the recession and Fed easing cycle – both of which have yet to commence but will by late spring/early summer,” he says.
While no two economic cycles are ever exactly the same, Mr. Rosenberg says the current market, and what’s happening now with U.S. regional banks, reminds him of the savings and loans crisis of the late 1980s.
“That also followed a period of excessive monetary easing,” he says.
He doesn’t see it as a repeat of the 2008 global financial crisis, noting the major U.S. banks are better capitalized, have stronger liquidity buffers and are more regulated and supervised.
Mr. Rosenberg believes it’s time for investors to get more defensive. He sees long government bonds as a top-performing asset for the coming year and believes gold will benefit from a decline in the U.S. dollar and real interest rates. For equities, he recommends investors look for sectors with no correlation to the economy such as utilities, health care and consumer staples.
Jennifer Tozser, senior wealth advisor, portfolio manager with Tozser Wealth Management at National Bank Financial Wealth Management in Calgary
Meanwhile, Ms. Tozser believes we’re “toward the end” of the current bear market when considering historical durations.
“A classic bear market definition is a fall from the market peak of 20 per cent or greater. A modern definition is the market is going down,” she says.
Ms. Tozser notes the S&P 500 is down about 17 per cent from the market peak in January 2022, “but what is more worrisome to investors is that the market is down 7 per cent from the February peak.”
She says the current market environment reminds her of 2010 because “2009 was a recovery year from 2008, but in 2010, the market direction wasn’t clear, and there was a lot of worry.”
Although the Silicon Valley Bank (SVB) collapse has investors worried about a repeat of the global financial crisis, Ms. Tozser says it’s a niche bank invested in the speculative technology start-up sector.
“The assets behind the 2008 market crash were U.S. residential mortgages, which are widely held across the entire nation,” she adds. “In other words, basically the direct opposite.”
Ms. Tozser says she’s been “modestly increasing” her bond exposure for the past few months and will continue to do so.
As for the market ups and downs of late, “you don’t get return without volatility.”
Jason Del Vicario, portfolio manager with Hillside Wealth Management at iA Private Wealth Inc. in Vancouver
Mr. Del Vicario says his “best guess” is that we’re about midway through this bear market.
“I base this on gut feeling from previous bear markets; the fact the markets aren’t cheap, and the yield curve has been inverted for a while,” he says.
Mr. Del Vicario says the current market drop “feels like every downturn in the era of quantitative easing, the U.S. Fed raises rates, something breaks and … then we go back to zero rates and money printing.”
There’s also some deja vu with the current banking crisis, even if it’s not as widespread.
“It might be called ‘depositor protection’ or ‘liquidity access,’ but let’s call it what it is – these are bailouts,” he says. “As long as bankers are bonused during the good times and bailed out for reaching for yield/returns, this won’t change.”
Mr. Del Vicario says he’s not switching up his investments due to the latest market moves and is instead focusing on buying “excellent businesses at fair prices and, ideally, holding them forever.”
“We don’t pay any attention to things we can’t control such as interest rates, inflation, or geopolitics,” he adds. “We have a bit of cash handy that we will deploy as opportunities present themselves.”
Shane Obata, portfolio manager at Middlefield Capital Corp. in Toronto
Mr. Obata is “cautiously optimistic” that investors saw the market bottom in October last year.
“[This year’s] earnings have the potential to hold in much better than the most bearish of estimates,” he says, adding that he’s optimistic about a return to high-single-digit earnings growth next year.
“As we move through 2023, investors are likely to focus more on 2024, which we think will increase optimism around stocks,” he says.
Mr. Obata doesn’t see the current banking crisis in the U.S. as a repeat of 2008.
“Credit is not the issue,” he says. “What we saw at SVB was mismanagement of risk combined with liquidity problems. We believe recent moves by the public and private sector will help to restore confidence in the financial sector and should prevent contagion.”
Still, Mr. Obata says he’ll be carefully watching lending standards “as tighter ones will likely weigh on credit growth and, thus, economic activity.”
His firm is staying defensive with portfolios, “which we believe is justified given economic uncertainty,” he adds. “At the moment, we’re finding plenty of attractive opportunities in areas such as infrastructure, health care and real estate.”
He also believes the Fed is approaching the end of the rate-hiking cycle.
“This should help investors to get more comfortable with the level of rates,” Mr. Obata adds. “As volatility comes down, we expect to see a significant increase in deal-making across asset classes, which should bode well for companies exposed to the capital markets.”
Thane Stenner, senior portfolio manager and senior wealth advisor at Stenner Wealth Partners+ with Canaccord Genuity Wealth Management Canada in Vancouver
Mr. Stenner believes we’re likely in the middle of the bear market. He says the broader equity markets could see a 20 to 30 per cent decline from end-of-February levels over the next nine to 18 months.
The current period reminds him of three different bear markets in the past – the 1973-74 oil shock, the 2000-02 dot.com bust, and the 2008-09 global financial crisis.
While some sectors show good value at this point, Mr. Stenner believes the broader markets are still overvalued, so he’s “very defensive” now, holding about 53 per cent cash. He also recently bought some longer-term bonds and holds commodities such as gold and silver, including the physical metals and mining companies that produce them.
“We are significantly underweight in various equity sectors,” he says. “We have been doing a lot of due diligence on sectors globally [with an aim to] buy them at much cheaper prices over the next six to 18 months.”
Anil Tahiliani, senior portfolio manager at Matco Financial Inc. in Calgary
Mr. Tahiliani believes we’re about three-quarters through the current bear market.
“The concerns about persistent inflation, higher interest rates and now the implications on the financial system have caused higher than normal volatility over the past year,” he notes.
He says the current market environment reminds him of the European sovereign debt crisis in 2010, “where the headline risk and market volatility were extreme, but the actual risk of country default was low.”
Mr. Tahiliani isn’t making any significant changes to his funds amid the market volatility.
“We’re still 95 per cent invested and telling clients that this a buying opportunity looking out one to two years. Buy on fear and buy on the dips for the long run.”
Stan Wong, portfolio manager with The Stan Wong Group at Scotia Wealth Management in Toronto
Mr. Wong notes the S&P 500 is up more than 10 per cent from the October lows and sees reasons to remain “constructive” on equities that include easing inflation, a more dovish and easing monetary relief from the Fed and China’s economic re-opening.
He also says the current banking crisis is “profoundly different” than 2008, citing a stronger U.S. banking system with tighter controls.
Mr. Wong has been adding “high-quality, value-oriented equities” to portfolios lately, in particular large U.S. financial companies that he says are now “oversold or near-oversold levels with very compelling valuations.”
“Volatility is the price of admission to the stock market. Market pullbacks and corrections are normal occurrences,” Mr. Wong says. “Since 1980, the average S&P 500 year has seen a 14 per cent peak-to-trough drawdown. Long-term savvy investors should consider taking advantage of these opportunities as they arise.”
Paul Harris, partner and portfolio manager at Harris Douglas Asset Management Inc. in Toronto
Mr. Harris also believes we’re in the middle of the bear market, pointing to factors like the ongoing volatility, the inverted yield curve and consensus that corporate earnings are expected to fall in the coming months.
Mr. Harris says this market reminds him of the 1980s when factors such as excessive fiscal and monetary stimulus, supply chain shocks and war drove up inflation and interest rates.
“I don’t believe this is like 2008, which was a liquidity crisis that caused capital markets to dry up,” he says.
Mr. Harris says his firm has maintained a higher cash position in its portfolios, waiting for a time to buy more equities at more attractive valuations.
Wes Ashton, co-founder and director of growth strategy at Harbourfront Wealth Management Inc. in Vancouver
Mr. Ashton believes we’re in the middle-to-late stage of the bear market.
“The S&P 500 bear market officially started on June 13, 2022 – a little over nine months ago – which is roughly the average length of historical bear markets,” he says.
He also notes inflation is trending downward, interest rates are slowing “with the possibility of decreases later this year and into 2024,” and that we’re in the third year of the presidential cycle, which is generally the strongest for markets. Mr. Ashton also says the outlook on corporate earnings is improving.
And while every bear market is different, Mr. Ashton says the human reaction is the same.
“For investors, the important thing is to put things in perspective and minimize making irrational decisions that could affect them over the long run,” he notes.
“Despite the current noise, once markets work their way through the cycle, investors will be rewarded with sustained periods of growth,” he says, adding his firm is sticking to its strategy of reducing traditional fixed income and adding more alternatives to portfolios including private equity, credit and real estate.
Ryan Bushell, president and portfolio manager at Newhaven Asset Management Inc. in Toronto
Mr. Bushell says the rapid decline in mega-cap technology stocks that dominated the S&P 500 in 2020-21 is responsible for the majority of the negative performance in equity indexes over the past year.
“Does that constitute a bear market?” he asks. “If so, it’s exceedingly narrow in breadth.”
He believes the drop in equity valuations, as a result of surging interest rates, has only just started.
“My instinct is to say this negative adjustment has further to go, but it’s almost completely dependent on the path of interest rate policy which has proven extremely hard to predict,” he says.
He sees similarities today to multiple periods of market turmoil throughout history including the 1940s wartime-spending-driven inflation, the 1970s stagflation and energy crises, the early 1990s real estate and savings and loan collapses, the early 2000s tech bubble and the 2008-09 global financial crisis.
“The biggest difference between now and almost every period mentioned is the demographic profile of wealthy nations, which continues to deteriorate glacially as governments feverishly try to prolong the status quo,” he says.
“How long we can rely on debt and financial engineering to do that is anyone’s guess, but I believe we are much closer to the end of the current global regime than the beginning. In my view, the current period is more uncertain than at any point since the Great Depression and World War II, given all the forces at play.”
Mr. Bushell says his portfolio remains conservative with “the majority of our longstanding clients remaining 85 to 95 per cent invested in a Canadian dividend-paying portfolio of companies that provide essential needs to people across North America.”
“We may be invested too conservatively if interest rate policy reverses yet again and risk appetite returns to 2021 levels,” he adds.
“However, we have far less capital drawdown risk than an indexed portfolio in a more difficult environment. ... Our eyes remain fixed on the horizon, not the waves immediately in front of us.”
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