LIONS AND TIGERS AND LOTS OF BEARS
We all follow our own paths towards our financial goals. Sometimes we appear to be on the yellow brick road where the sun is shining, the sky is blue and there are no dangers to be seen. Other times we are in the deep, dark forest where we just know there are lions and tigers and bears. Oh my!
The first quarter of 2022 was certainly no highway to happiness. Instead of lions, we had a horrible, brutal war in Ukraine. Instead of tigers, we had the seemingly endless wave of COVID variations causing continual havoc in supply chains, labour supply and peoples’ lives. Instead of bears, we had the reality of the highest inflation in almost 40 years and the certain prospect of rising interest rates. It is not surprising that under these circumstances both the stock and bond markets had a hard time. In fact, the bond market suffered its most precipitous decline in at least the last seventy years, and perhaps in market history. Investors who believed that fixed income would provide a safe haven were greeted by fangs and claws. For example, owners of Austrian 100-year bonds lost 50% of their market value in the first quarter.
All the major stock markets dropped into correction territory, falling 10% or more, and in the case of the NASDAQ index, into the bear market zone, down an alarming 27.4% from the peak. In part this was a logical reaction to the dangers noted above, and in part, it was a natural reversion to a more moderate valuation model after the very substantial gains in 2019, 2020 and 2021. As always, however, the market pendulum appears to have swung too far in the negative direction and it was gratifying to see a fairly sharp reversal in the last two weeks of March. The S&P 500 climbed 10% from its bottom, reached on February 24th, and the NASDAQ, regained 15%, cutting its loss about in half.
The one market sector that did well in the first quarter was commodities, and in particular, the energy group including oil and gas. The prospect of Russian exports of fossil fuels being prohibited raised the spectre of a substantial world-wide shortage of the energy upon which western and Northern Europe are particularly dependent. Crude oil, which we remember trading for under $50/barrel for most of 2020, rose to as high as $129, and has since settled to around $100. This was great news for Canadian oil and gas producers, many of which doubled in a very short period. We are not owners of commodity stocks as most of our clients know. Oil producers are the textbook model of “price takers”. They cannot control the price at which they sell their product and are doomed to suffer through successive boom and bust cycles as events over which they have no control determine their profitability. Just as we missed the carnage in 2020, we missed the party this spring. Over time, we are convinced that avoiding this volatility is good for our clients, however painful it might seem in the last few months.
Every investor has to live in the real world. We obviously cannot control Putin’s imperial dreams; neither can we make COVID disappear, much as we wish we could. We have to decide how we should react to events such as these, and how to safeguard capital while designing portfolios for future growth. Most of the time, this consists of doing solid research to find the best companies trading at the best prices. Great companies persist through inflation and war and disease. The market prices of their stocks may go down, and then up, and perhaps down again, but the most important thing, really the only important thing, is that great companies do their job: they make money for their shareholders.
We are about to enter earnings season during which we will see the first quarter results for our portfolio companies. Most of our work is involved in monitoring those results, interpreting them, and deciding if action is required. Over the long term, this is where the value gets added. Not by trying to time the market or commodity cycles, not by trying to guess what Russia will do or how quickly the central banks will raise interest rates, but by doing the basic, fundamental analysis that is the foundation of our firm.
Chairman, David Baskin
An Ernest Opinion
Barry Schwartz on BNN Market Call – March 4th, 2022
David Baskin on BNN Market Call – March 22nd, 2022