Welcome to 2016

Most investors are likely aware that the month thus far has seen a rough start to the year. For the first 10 trading days in 2016, for the benchmark S&P 500, it was already down 8% on the year and off to its worst start in the history of the index.

Given this, what is the best thing to do? Well, run and hide of course! For the most part, that is exactly what the market has done, and for good reason. This volatility is scary for most people. Tongue and Cheek of course… Sometimes you need to peel back the numbers a bit to gain a sense of comfort or discomfort. Here is what we are seeing.

First, the S&P 500 started the first 10 days of the trading year with its worst start ever. Our friends at Bespoke compiled some numbers on the worst starts over the last 100 years or so:

S&P 500 Worst 10 Day Starts


 

 

 

 

 



This is where it gets a bit interesting. If you needed all your money after 10 days of trading, the outcome would be grim. However, the reality is, no one needs all of their money after 10 days. If they do, they should not be in the market or anywhere for that matter.

If we play this chart out to see what happened during the rest of the year, in the selected worst day’s scenario, we get an outcome that looks rather encouraging.

S&P 500 Worst 10 Day Starts

So should we be panicking? The answer to this question is to never panic. Obviously we do not have a crystal ball that tells us that 2008 will not happen again; however, with some assessment, we know today that there is not a huge syndicated mortgage loan issue in the world. We also know that commodities and energy are taking their toll on the world on a number of levels ranging from the potential for bad debts at banks to inflation or lack thereof.

To start 2016, we are essentially experiencing more of the same. Volatility, questionable growth out of China and developed countries, investor complacency, etc. The list goes on and on. We are also starting to see bubbles in Canada develop. For example, housing in certain geographic sectors of the country have reached unaffordable levels for some people living in those cities. The free money trade has essentially inflated asset and home prices in select sectors of our markets. A recent house listing in Vancouver made national headlines because it is clearly a teardown at the affordable price of $2.398 million.

From a headline perspective, this is likely one of the more crazy examples out there, but it is a reality in part of the country. It will be interesting to see if it sells.

Sideline – An old real estate friend of ours once said you make money in real estate when you buy, not when you sell.

Forecasting

In a recent sitting of the CFA (Chartered Financial Analysts) Society, it was discussed on the probabilities of forecasting the future returns of stocks and the markets. The findings suggested that, over a 3 month period, the outcomes were very scattered. This suggested that making a forecast today and reviewing it in 3 months had a wide degree of potential outcomes. Meaning, forecasts are not very accurate over 3 months. Under the same circumstances, if you reviewed the data 5 years later the outcomes became somewhat more clustered. This suggested that the longer the time period, the greater the potential for comparable outcomes. Meaning, greater probability of forecast occurring. The third and final set of data was the 20 year experience, and the outcomes at that point became more focused.

This suggests that over time (a long period of 20 years) the forecast for returns in stocks had a much greater opportunity to be correct. This does not suggest that we should be making 20 year forecasts or looking for those that do. However, it reminds us how insignificant a short term forecast can be with regards to probabilistic outcomes.

We put this into action as a social experiment the other day by looking at the weather forecast. The forecast two days out suggested flurries with a chance of rain. The outcome was a sunny day. Now let’s put this in finer perspective; the weather people making these forecasts have DOPPLER RADAR! The world changes fast and frequently – even the weather.

Why is there so much concern about Oil?

We have been asked recently why we are spending time looking at oil and why the world seems to spread so much chatter on the subject. For us, as Canadians, it remains a primary resource for the country. For the world, it has become more of a measurable risky asset as compared to other risky assets. Over the past number of months, the correlation of oil to the S&P 500 has become more interrelated. This basically means that the broader markets are moving around more with the daily moves in the price of oil. The graph below shows the increased correlation over time.

Source: VIP Wealth Solutions and Bloomberg

Does this make any sense? Perhaps in time it will, but in the short term the price of oil has little to do with BCE on a day in and day out basis.

The headlines we see and hear tend to be more dominated with the oil trade and what is happening in the markets. This relationship will change, but for now it is one we are taking note of.

Inspiration

We wrote this down and then took a moment to deliberate the world and some investing inspiration. What if a 2008 scenario happened again? Did the world stop spinning? Did we prevail? The answer to these are obvious in hindsight. Human nature prevails and advances. Whatever circumstance falls before us, be it volatility or bad markets, we will prevail. We are looking at the facts and making decisions based on those facts. We understand the nuances and timely correlations, but also understand that these are not permanent conditions. We remain inspired by our daily findings and discoveries. We remain less likely to predict the future and more likely to look at the facts and pursue reasonable outcomes. Inspiration begets inspiration.

Thank you for reading.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.