June 11, 2020Money Financial literacy Quarterly update Quarterly commentary
Portfolio Program Rebalancing
You may be surprised to recall that the World Health Organization (WHO) declared SARS-CoV-2 a Public Health Emergency of International Concern on January 30. Yet, the stock market surged ahead for three more weeks. Fear of missing out (FOMO) on the last few months leading up to a U.S. federal election and an incumbent president is known for spending on business interest kept investors' foot to the pedal.
The S&P500 hit an all-time high on February 24, 2020, before the gravity of the situation set in. Between the peak and the trough, the market whipsawed at unprecedented levels, with volatility spiking over 400%. Over that short four weeks, the total days the market dropped tally -71.3%. Still, on the days that the market rallied over that same period, it jumped almost 50%. The net peak to trough drop ended down -33.5%. (source: Thomson Reuters)
Fast forward three months later and our portfolios are all producing income of 3-6%, and are rest near flat returns on the year.
Heading into the summer, and after a significant stock market rally, we are taking profits and reallocating them to preferred shares and short-term fixed income. We are not out of the woods yet. There has never been a pandemic in history without a second surge of infection. It isn't easy to believe that the market can continue at this recent pace. There is a significant disconnect to the number of people who will likely remain unemployed and the number of small businesses that will not come back to life. Nevertheless, the amount of financial aid is multiples of the amount added to the economy during the 2008 financial crisis. Added cash in the system adds to economic growth.
Preferred shares have dropped in market value, which has provided an opportunity for patient income collectors, like us. Based on the five-year Government of Canada bond yield, currently less than half of a percent, the dividends on these investments are determined every five years. The lower anticipated dividend yields, along with the small size of the issues and few buyers, means that the prices are much lower than they were just a year ago. Many of these investments will not reset their dividends for several years. The new dividend rate is based on the $25 face value, not the current depressed market values. That translates into dividend income on the current price of approximately 5-9% in many cases.
Common shares added to the mandates align with our quantitative model for securities with growth (even during COVID19), at a price of at least fifteen percent below our expected price, with a preference for sustainable dividend policy.
I hope that you and your family stay well and that the "new tan lines of 2020" mean that you're getting out side to enjoy the sunshine. Take care and stay in touch.
If you would like to arrange a video conference, telephone call, or social-distancing meeting in person, do not hesitate to call or email our office.