No Rally This Christmas?

Good day,

Every morning my kids remind me that Santa’s on his way but it’s uncertain whether he will be bringing along the seasonal Santa Claus market rally we often see at this time of year. Equity markets continue to see net declines due to uncertainty surrounding the outcome of global trade tensions coupled with fears that rising interest rates will hurt the US economy. If we get a little tax loss selling, we could see a bit more downward pressure over the next few trading days, but the market is overdue for a relief rally which many institutional investors (us included) will likely deploy money into. Looking into 2019, I suspect volatility will continue until there is some closure on trade agreements.

As I’ve written many times before, greed leads to overbought markets and fear leads to oversold markets. This hasn’t changed and will never change, the only thing that differs is the events that trigger the behaviour.

Over the last year or so we’ve stressed the importance of taking a more defensive stance, our rationale being that the current bull market has run for over 9 years (well beyond the 5-6 year average), and because equity valuations were no longer cheap. This last February we began reducing our equity weightings and shifted dollars to private debt, an asset class that is not correlated to equity markets and has seen positive returns every month since. This has allowed us to significantly soften the blow. As I type this the S&P 500 is down 4.8% this year and the TSX is down 11.1%, meanwhile, the large majority of our client portfolios show low to mid-single digits declines.

While our client portfolios did exactly what we expected them to do in the current environment, subconsciously, Recency Bias often kicks in. Psychologists who study investor behaviour continue to tell us that we all have biases and are simply unaware of them. One common investor bias is known as Recency Bias, which manifests in terms of direction. When markets climb, we expect them to continue to do so and vice versa during declines.

We’ve been spoiled with low volatility and primarily upward markets for 8 to 9 years. Unfortunately, we tend to ignore the overall gains we’ve made over an extended period of time and fall into the trap of focusing only on the most recent declines from the high watermark our portfolios have reached. Many years ago, a wise man gave me a tip which I haven’t forgotten. When updating a net worth statement, reduce the value of all your assets (real estate included) by 10% and you won’t be disappointed when the underlying asset values drop. Recognize that expecting only increases from the most recent highs implies that financial assets only climb and never decline.

While being aware of where we are in the economic cycle is important, running away from equities entirely is a dangerous game to play. Stay tuned as I will provide our 2019 outlook in January.

Until then, spend time with your loved ones and don’t forget about those less fortunate. My wife and I have supported a handful of the charities we tend to gravitate to and I know many of our readers do the same.

I wish you all the very best for this holiday season and a happy, healthy and prosperous 2019.

From my family to yours,

Merry Christmas, Happy Holidays, Happy Hanukkah and Happy New Year!


Daniel Popescu CFP, CIM, FMA, FCSI

President & CEO



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