Normally we discourage our clients from spending too much time worrying about the day-to-day gyrations of the stock markets. In the first place, much of what happens on any given day is simply noise, random ups and downs caused by traders. In the second place, since we are not traders, and we do not react to these daily moves, there is nothing to be gained by paying too much attention to them. But we recognize that these are not normal times.
We at Baskin Wealth Management ARE spending more of our time than usual worrying about the companies in which we have invested. Our Portfolio Management Committee which usually meets monthly is now meeting weekly, and we are scrutinizing earnings reports, economic data and company news releases even more closely than before. We are also writing more essays, some of which are attached to this newsletter. We felt that it would be worthwhile to share, on a more regular basis, some of our thoughts with you, as well as the data for the month and links to essays you might have missed.
April was the best month for the U.S. stock market in 33 years. This follows the extremely rapid plunge in the markets which saw stocks fall around 32% in a period of five weeks starting in mid-February. The gains in April erased more than half of that downdraft and while stocks are still down for the year, the losses have changed from horrible to a more run of the mill pull-back. The Canadian and US markets have diverged, chiefly because of oil. The TSX index is down 13.3% for the four months ended April 30th, while the leading American index, the S&P 500, is down by 9.9%. Significantly for Canadian investors, due to the depreciation of the Canadian dollar against the US dollar during the first four months of the year, the S&P 500 measured in Canadian dollars is down only 3.5% over the period.
It seems paradoxical that in the face of the worst global health crisis in 100 years stock markets should have a great month. Partly this is a result of what is now seen as an over-reaction to the pandemic in February and March, and partly it is in anticipation of a partial reopening of the American economy in May and June. There is also some optimism, perhaps too much so, that a drug or drugs will be found to ameliorate COVID-19 and reduce the impact of the epidemic. The comeback was led by the large technology companies such as Alphabet (Google), Apple, Facebook, Microsoft, Netflix and Amazon, all of which rose during April. In fact, the NASDAQ index which is dominated by the mega-tech firms was down less than 1% for the first four months of the year.
As good as the technology stocks were, they could not completely balance the losses sustained by other major industries. Amongst the biggest losers in the first four months of the year were the following sectors:
- Oil and Gas – Making the health crisis even worse, Saudi Arabia and Russia chose this time to engage in a highly destructive and senseless race to the bottom by greatly expanding oil production just as demand was experiencing an unprecedented decline. As anyone could have guessed, this led to a disastrous fall in the price of crude and the real possibility that the world would run out of storage capacity. Just before the expiration of the futures contract for May delivery, owners of contracts had to pay buyers to take the oil off their hands. Even now, as markets have calmed down, crude oil is trading for about 1/3rd of its price at the end of 2019. This has raised the possibility of wide-spread bankruptcies in both Canada and the U.S.
- Transportation and Travel – Global air travel has been reduced by over 95% and those hotels that are still open are reporting occupancy rates in the range of 5%. All companies related to this industry face existential risk. Governments are providing bail-out funding but if the ban on international travel continues for a long time, there is no doubt that some major airlines will be forced to seek bankruptcy protection, as will some hotel chains.
- Nursing Homes – The tragedy of large-scale outbreaks and numerous deaths in long term care facilities has caused sorrow that will turn to rage. Many operators will face class action law suits, and all will face new regulations that may make profits impossible. The sector will certainly have a major restructuring ahead of it. Investors who correctly foresaw the increasing demand for these chronic care homes have seen their earlier returns decimated.
- Automobiles – The two large American car-makers, GM and Ford, have each seen their share prices cut in half. Everyone is driving less and with visits to dealer showrooms off limits, car sales have fallen sharply. Rental car fleet sales, a staple of the big car companies have also declined along with the rest of the travel industry. The car companies required major government bailouts after the 2008/09 financial crisis, and this might be the case again depending on the timing of a sales recovery.
- Retail Stores and Restaurant Chains – For obvious reasons these businesses have had a horrible time and their stock prices reflect this. It is now likely that most of the major US department store chains such as Macy’s, JCPenney, Neiman Marcus and Nordstrom will face bankruptcy or re-organization. Restaurant chains have fared little better and many familiar names may disappear.
I am happy to say that we have no remaining exposure to any of the industries noted above, save for our travel-related company Vail Corporation. As a result, all of our equity portfolios substantially outperformed the major indexes for the period ended April 30th.
Many clients ask us what is going to happen next. We don’t know, and we don’t think anyone else does either. The circumstances are, if not unprecedented, at least highly unusual. In these conditions we are continually evaluating our portfolio companies to ensure that they will remain viable, will not have to raise capital at the wrong time, and in most cases, will continue to pay dividends. It is notable that so far, only one of our fifty or so portfolio companies has suspended its dividend. While it is certainly possible that others could follow, it is a testament to the quality of our holdings.
I urge you, if you have not done so already, to read the essays that are linked to this newsletter. They will give you an insight into our thinking as we navigate these uncharted waters.
David Baskin, President