What Lies Ahead…

What Lies Ahead…

As I prepare for each week, I like to do my own recap of the markets. I look at trends over the last week and scale it back to the month and quarter to see how the big picture evolves. Even though everyone is linking the market depression to COVID-19 (which is fair), I thought it would be an interesting opportunity to look at the previous market fluctuations and evaluate how this one compares.

I found a great article from Forbes that breaks down different recovery patterns, and I thought this would be a good place to summarize it and give my impressions.

There are four common shapes to describe market recoveries. The “V”, “W”, “U”, and “L”. The “V” and “W” are the most common, because the “U” is really a variation of the “V”, and the “L” is very uncommon. But let’s start in alphabetical order.

The “L”

The “L” is associated with a worst case scenario. As the shape implies, there is a sharp drop in the market which doesn’t recover, or at least takes a long time to transition to an upward trajectory. This shape hasn’t been seen in a long time, but most recently appeared in the 1990’s in Japan, known as the ‘lost decade’.

The “U”

If we look backwards in time, we’ll see that the “U” shape was a part of some of the bigger market events. It depicts a downward movement followed by a “bottoming out” period. This shape is seen through the Great Depression, as well as some of the market events in the late 1900’s. The “U” illustrates an economy that has declined without an individual stimulus of recovery. It leads to a slow incline in the valuations of the market rather than a stark climb.

V shape graph of market recoveryThe “V”

The “V” is a more common variation of recovery. It represents a sharp decline and a quick ascension back to original (and most often higher) values. It is more likely that the contraction and expansion are a result of an outside factor. For example, in 1952, when the market was still ‘booming’ after the Second World War, the US Federal Reserve raised interest rates in the anticipation of disproportionate inflation. This caused a “V” recovery from Q4 1952 to Q1 of 1955.

W Shape Market RecoveryThe “W”

Most people who are preparing for retirement remember the crash of 2008 vividly. The Lehman Brother’s went under and the economy fell in hot pursuit. Hindsight being 20/20, we can see the market crash of ’08 as a representation of a “W” recovery pattern. In the late stages of ’07, there was a relatively small and quickly resolved market depression followed by the major fall halfway through 2008. The minor correction combined with the major event form a “W” pattern.

So, what does this tell us?

Having knowledge about the ABC’s (or rather UVW’s) of market recovery is only helpful if we can apply it. Unfortunately, we can’t see a pattern until after it has appeared and it has joined the rest of the recoveries as part of our history. That being said, we can look at the behavioral patterns of people and how the COVID-19 pandemic varies or resembles patterns seen before/during previous market disruptions. Experts would agree that the market behavior would best point toward a “V” or “W”, but only time will tell. The rational for the “V” is that once we are allowed to mingle in public again, people will return to stadiums and restaurants, causing a quick surge of money flowing in and out of the economy. Specialists fear a “W” recovery if governments re-open the economy too soon. The news has mentioned the idea of a ‘second wave’ of Coronavirus stemming from healthy individuals returning to ‘normal’ and interacting with asymptomatic people. This would cause a second impact of new patients in hospitals, and see governments re-think their strategy, having potential economic consequences.

If we self-isolate and flatten the curve, a “U” shape could emerge. This would be caused by a slow and strategic introduction of economic stimuli. It could be even more pronounced if people were to be skeptical at first. Imagine the governments fully opening markets trying to create a “V” response. People are still fearful and decide to continue the limitations on their interactions. This means there is a slow and steady increase to economic activity rather than an ‘opening the floodgates’ response.

All that being said, we can’t predict what the market will do. People have been trying to time the markets for decades. And some have made careers out of it. It will be interesting to see how this plays out. I imagine that whichever way it pans out, this will become a unique lesson for us all to learn from.

In Times of Turmoil

In Times of Turmoil

I don’t think anyone would be confident in saying that they are comfortable in times of turmoil. Whether we’re talking about finances or family, by definition, turmoil is a distruptive force that can shake the “norm”. Though we are currently facing a “time of turmoil” as COVID-19 isolation and economic factors play their role in dustrupting our normal way of life, this blog post is less to do with what is going on outside our front doors, and more to do with how we learn from this experience.

There will be a time when we look back on this crisis, however long it lasts, and a number of things may come to mind. For some, the memories may focus in on the hardship of unemployment and family struggles. For others, they’ll remember the endless TikTok videos about how people are creatively using their obscene amounts of toilet paper. The question I will be asking myself when we return to a period of normality, is “how did I grow through this change?”

I am a person who thrives during stress. When I was a paramedic in Sudbury, I loved the high stakes calls, because it gave me a chance to use the skills I had spent years learning. When we finished a high-stress call, we would often have a period of discussion, called a debrief. It allowed us a chance to talk openly about the call, but it also gave us an opportunity to grow and improve our craft. We would discuss the positives and negatives of the situation, with the goal being to make sure that next time we experienced a situation of turmoil, we were better prepared to face it.

So the question I pose to you, the reader, is this. Imagine we are sitting in a coffee shop in a year’s time. I’m drinking a decaf mocha, we’re still laughing about how Trudeau said “speaking moistly” on live television, and everything is back to “normal”. What would you want to have happened in your life, both personally and professionally, to be able to say, “I grew through the experience and I came out on the other side in better shape than I started.”? For me, I am working at continuing my business as best I can, but I am also using this time to better connect with my family while we’re all together (excluding my brother, who is stuck in Ottawa).

My last “time of turmoil”, was during the time I lived in Alberta. And though it does not compare to the experience we are having as a community, I still came away from my time there having learned important lessons. I worked at a car dealership. Making a long story short, I came away from that experience having learned that money is not worth the sacrifices I was making. That principle has made it easier for me to focus on my new goal of connecting with my family. It takes the edge off of the burden of financial worry, and instead lets me focus on building my business to be client-focused, rather than income-driven.

The bottom line is that change is inevitable. Some of us will change for the better, some will fail to adapt. My advice for those who have a plan, whether financially or personally, is to stick to the plan. One of the best pieces of advice I ever received was from my Dad (who probably got it from someone else, but that’s not important). He said, “Never doubt what you know to be true in the light, when you can’t see it in the dark”. In the world of financial advising, I stress to clients that we “stick to the plan”. But the lesson is true outside of your finances. Take this time to evaluate the goals you had for yourself. Dig up the old “bucket list” and explore how you can achieve those goals and tie up those loose ends. I know that I have a partially finished bachelor’s degree, and this might be the time to finish that part of my education.

However you are dealing with the COVID crisis, start answering the question from the coffee shop. Turn this “turmoil” into a time of opportunity! Start working on the small things that will give you the peace of mind to answer the question, “I’m proud of myself.”

Investment Psychology: greed, fear

Investment Psychology: greed, fear

I’ve been putting together a presentation for a group of young professionals and I have been focusing a lot of the discussion around investment psychology. This illustration came up quite a bit and I think it demonstrates a problem with common investment philosophy. The statistics show us that people love to buy high and sell low, and Carl Richards’ book presents that really well with this picture. It was a reminder to me why good advice is so important to navigating today’s financial landscape.