Updated: Sep 16, 2021
Anyone watching the financial channels, your heads are probably spinning lately? There is a lot going on, a lot of opinions, and a bull market in effect that doesn’t show any signs of slowing? The pent-up demand is coming back in waves, and anyone who was in early is seeing nice gains. But like every other bull market, there is always an end point to the gains and a slide back at some stage. So when that is going to be, ... is anyone’s best guess? However, in my humble opinion, the market momentum and spending sprees are likely to continue for awhile until Covid restrictions are fully relaxed and in the world’s rear view mirrors, and the supply and demand scales are rebalanced. With the ongoing disclaimer that I am not a financial advisor or analyst, and that I just like to try my own hand at predicting, I’d hazard a guess that economies will not cool off completely now until we go through 2-4 more quarters and some annual statements following covid restrictions being lifted. Of course, there is ALWAYS the chance of a surprise (or two) rolled into any prediction. All we need is a war, or some other crisis or highly emotional news that hasn’t revealed itself yet to change anyone’s rational market predictions. And when a crash happens, you can bank on another recovery to go with it.
In the last year and a half a lot of investment has gone into covid recovery and future potential. Investors are shooting darts at any and all stocks they see discounted, hyped-up, on an upward trends, or have some potential during and beyond covid like Shopify, EVs (electric vehicles), plant-based food products, bio-foods, and similar tech stocks. Lots of cash has going into tech spaces. Some of the investment early on has been very predictable, like investors barreling into gold, silver, and blue-chippers at big discounts or for being safe-havens. Many were in these very early either during or shortly after the March 2020 crash, and many are jumping in now, quite a bit down the track on the economic growth train. Many new investors entered the market since covid looking for “get-rich-quick” schemes, spurring phenomenal growth in areas like the crypto market and reddit meme stocks like Gamestop and AMC. These investments (to me) still have regulatory, financial, and business proof-of-concept hurdles to clear, but they have also surprised everyone (including me) with their growth and resiliency despite the increasing negativity of market pundits towards them. I still feel much of Gamestop’s resiliency comes in the form of loyalest investors trying to teach hedge funds a lesson, and they are unwilling to let go of these non-performing investments in hopes of repeating the exponential capital growth with the “short squeeze”. Bitcoin enjoyed a run-up in price as world banks lost market share due to a deflated dollar and/or anti-trust issues, and some celebrities jumped on the bandwagon with enough money and fame to run the price up further. Then some of these celebrities (Elon Musk) quickly bailed out, rapinng his followers for millions. Investors have sucessfully made some gains on these long shot investments once, so the ask “why not again?”. These investments are all one domino away from a collapse (or gain). Bitcoin plumetted 43% in the last month, waking up many bitcoin investors to the true volatility and risks. Apps and platforms like Robinhood and Coinbase have made it extremely easy for anyone with a bank account, and phone, and a password to start actively trading stocks or crypto currencies. Accessibility to the markets is WAY easier than it has ever been, though ongoing SEC reviews (Robinhood) and negative government sentiments (e.g. China banning bitcoin) are slowing this train down a bit. The jury is still out on how much bank debt (risk) is associated with these recent appetites towards investing.
So what are the next opportunites? In this covid world it’s anyone’s guess! Some things I feel are more predictable than others? For example, the world has scaled back travel and everything associated with it since March 2020. Since then world fuel demands slumped by 12-15%, and are slowly recovering now in 2021. Much of this demand slump is associated with airline, ship cruises, and vehicle travel for work and play. So I feel there is a bit of a runway for travel-related and oil and gas stocks to rise in the future. The oil animal is a slow moving beast though, and a lot of the demand will be initially met by storage and existing reserves. Producers will have curbed their production, severely cut their operating costs, and eliminated R&D capital through 2020 and 2021. With higher demand and lower production on the horizon comes higher premiums to cosumers. It’s already happening. These costs cannot be diluted until supply catches up to demand, and that will not happen quickly for a variety of logistical reasons. As a result of cost cutbacks in their operations, and increased revenues from the higher fuel costs and demands, the oil and gas industry will likely enjoy a temporary period of higher returns and share value in the near future. The energy sectors are facing tons of challenges though, and any period of elevated pricing will eventually be tempered by the uncertainties created by regulatory roadblocks, clean energy regulations and policies, pipeline constraints, and associated carbon taxes this industry continues to get hammered by. After all, the things that plagued this industry pre-pandemic are going to be there 3-fold post-pandemic, especially now that the USA is jumping on the carbon-reduction bandwagon.
Long story short, there are likely some travel-related and energy stock opportunities out there with short-lived share spikes if you can find them, ... but be careful! Like Kenny Rogers famously said in the song “The Gambler”, “you gotta know when to hold’em, and know when to fold’em!” PS a better way to play this sector is with a quality sector fund. If you would have bought into XEG (i-shares S&P/TSX Capped Energy Index ETF) in March 2020, you would have tripled your capital investment today while reaping a $0.15/share/year annual dividend. Another way to look at this is if you would have bought $10k of XEG at $3 in March 2020 dip, your 3333 shares would have paid you $500 in dividends over the next year, while tripling in value to $30,000 due to the fund price increase. But this is the story with many, many stocks since the last crash and lots of these are already held inside many, many diversified, index funds.
To reiterate a story I’ll likely tell over and over in this blog, we fired our advisor and dumped our high fee portfolio that came with him, and have been passive, index-tracking, self-managed investors since 2008. Since retiring in mid-2019 and rebalancing our portfolio in 2019-2020 pre-pandemic, 90% of our portfolio is in 2 simple Vanguard ETFs; VRIF and VRE. VRIF is a newly-founded, well-diversified, auto-balancing, retirement income fund and VRE is a real estate investment trust (REIT). Both have low MERs I can stomach versus what I get, and both work tirelessy to pay us a monthly, reliable income with near-zero effort on our part. The other 10% is mostly in Canadian banks we bought into during the last market crash (obviously I’ve been to this BBQ before, so I got to the front of the line for extra ribs), and a couple Oil & Gas stocks. These energy stocks are the few I held onto, expect to recover post-pandemic, and will liquidate when they get close to their ACBs to further simplify our portfolio. Sovereign stocks held in taxable accounts benefit from a dividend tax credit that puts money back in your pocket. Canadian banks are very strong companies and stocks, and pay 5-6% in quarterly dividends. The big banks in Canada have not had a dividend decrease in the last hundred years. Not saying they won’t, it just hasn’t happened, even through crashes and covid, so why would you expect it now? They obviously know how to protect their returns.
I don’t sweat the unusual market trends or market hypes. The market works for me (paying me regularly), and I try very hard not to work for it (by giving up the capital portion to long shots and gambles). Great companies pay you through solid financial performance. In simple terms they do this by reliably making more money then they spend (profits), and by using their profits responsibly to increase the company’s monetary (share) value. They do this while returning some of the profits back to investors in periodic dividends as incentive to stay invested. Bad companies spend more then they make, losing money and value for investors, never pay dividends or cut them too deep and for too long. Really bad companies spend more than they make while paying you with other people’s money (Gamestop). They tend to have high trade volatility, hand out high salaries, raises, and bonuses to their executives during bad times, while continuing to lose money, …. amongst many other red flags. I use both Gamestop and AMC (billions of dollars in highly speculative investments) as examples of this, both continuing to grow in market cap way beyond their true value while showing negative earnings (EPS). It really defies logic? Then you have the likes of Bombardiere, who has recieved millions in government bailout loans while their stocks have plummeted and lost significant value for investors.
I try to keep it simple in retirement, live well within our means (income vs expenses), buy discounted, premium ETFs or Canadian stocks with any free cash on hand, and don’t care what goes on around me other than it’s very interesting to watch, discuss, and write about. Despite all the clever marketing these days to lure investors into their high fee or risky products, I am bought into time-tested strategies. Strategies like tracking the market with index ETFs, cost-averaging/doubling down in crashes, low fees, and a steady savings and DRIP. I have a DWP now, aka “dividend withdrawal plan”!
I have my own theories why so many people are climbing on the investment bus and/or gambling now? A) they are likely saving more in this covid environment, B) they have the time, access, and where-with-all to learn (a little bit), get excited and try investing/trading, and/or C) many of them may not have much to lose at this point so volatility is not as much of a factor? This too may pass after covid, and the market will have a relative correction as retail investors take their money (hopefully profits and not losses) and start spending elsewhere .... who knows???