Recap & Macro Outlook: Fear and Greed Take 2
We wrote to you on Tuesday when the market initially turned negative and thought that it would be a good idea to write again as the week is closing off. In our last note, we wrote that the financial press has essentially pushed the panic button but our unanimous conclusion at this week’s investment committee was “during these events, we look past the fear and look at the data”. And “a valuation correction across all asset classes was generally expected at some point”.
With respect to stocks: The US equity market had a very volatile week with the VIX (a measure of at-the-money option volatility) posting its biggest single week increase ever (Fig. 1). Equity markets were in official correction territory (until a rally into the close). Canada just missed a correction but had weaker January returns. Therefore, the year-to-date period is only down 7% . Global markets fared slightly better with Japan down 9% and Europe down 7% from their highs. Fixed income markets are viewed as a safe-haven asset after falling dramatically with interest rate expectations since the beginning of December.
With respect to the data: We have seen a few more data points this week that continue to reinforce our view of a strong economy and the potential for increased interest rates in the US (US JOLTS data & unprecedented fiscal stimulus). The Canadian situation, however, was different today. We had a very poor employment report (Fig. 2). Economists had expected that we created 10k jobs last month but we actually lost 88k jobs. The unemployment rate increased to 5.9% and, at the same time, wage growth increased. This last occurred in 2009 and in 1982.
“This means that” we continue stay the course with our investment process. In our Core mandates we have more than 20% cash and have been quite active this week repositioning the portfolio. We have also just started to do some bargain hunting. Please check back next week to see our portfolio changes and investment views.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.