Making sense of the markets this week: February 6

The first modern-day pandemic—two years later

To my knowledge, I was the first financial writer in Canada to cover the pandemic or suggest it as a concern. It’s hard to believe that we’ve lived two years of our lives in a scary and confusing pandemic. Two years ago I wrote this post on my blog, “How to prepare your portfolio for the coronavirus outbreak”.

On February 1, 2020, it was not yet considered a “global” pandemic. The first cases were just being reported. And my blog post and headline appears trite and uncaring considering the number of deaths and illness. But again, the destructive path of the coronavirus was not yet known. I addressed the risks and the performance of the markets in previous epidemics. 

And, yes, I put some asset allocation ideas on the table for consideration. 

I did a follow-up post about the performance of the pandemic portfolio. The risk management ideas certainly did the job in the early stages of the pandemic. Adding gold and long-term treasuries helped the model outperform a traditional balanced couch potato portfolio. In fact, gold hit an all-time record high in August 2020. The price started to soften as the perceived risks of the pandemic began to lower. 

As always, those are classic risk managers that you might include in an advanced spud portfolio.

When the pandemic struck, many investors were looking to get an edge over the markets. MoneySense investing editor-at-large Jonathan Chevreau looked at the stay-at-home ETFs and the COVID-19 index created by Jim Cramer, the host of CNBC’s “Mad Money.” Chevreau writes: 

“Based on this chart, I’d say Cramer’s COVID-19 index has thus far earned its keep and kept investors out of stocks hardest hit by the virus. The 100 COVID-19 stocks include more than just WFH [work from home] and FANG stocks [Meta (formerly Facebook), Amazon, Netflix and Alphabet (Google)]. They also include pharma and biotech stocks working on a COVID-19 vaccine: Abbott Laboratories, Eli Lilly, Gilead Sciences, Johnson & Johnson, Moderna, Pfizer and Regeneron Pharmaceuticals.”

While core index investing worked well through the pandemic, one could have gained an edge by paying attention to work-from-home stocks and sectors versus the reopening stocks and sectors. 

The biggest surprise to many is that big U.S. tech proved to be the most resilient of the sectors. We don’t usually think of growth sectors as defensive. But we stayed home, worked from home, shopped from home and renovated our homes. Names such as Microsoft (MSFT), Alphabet, Netflix (NFLX), Apple (AAPL) and Facebook (FB) became big tech utilities. 

How will I wrap up the two years? 

We had the fastest market decline followed by the fastest market recovery—thanks to mind-boggling amounts of (much needed) government stimulus. Governments promised to do whatever it takes to support citizens, businesses and the economy. 

Miracle vaccine development was a life saver. We had hope. 

We experienced waves of COVID infections and moved through many stages of lockdowns and restrictions and subsequent attempts to reopen the economy and get back to “normal.”

We are all changed. 

We began to reflect on our lives and the meaning of life. We got a taste of working from home and more time to ourselves by not commuting. We questioned our mortality, and the whole work-life balance thing got turned on its head. We started quitting jobs and saying no to returning to work. Many are choosing to design their own career and life paths. 

A common COVID reaction is and was: Take this job and shove it. 

Moving forward, we will likely continue on with a hybrid work-from-home and work-at-the-office hybrid. Workers are in the driver’s seat. For now. 

Thanks to the stimulus, global growth remained somewhat resilient. We continue to fight our way back. In fact, Canadian Gross domestic product (GDP) returned to pre-COVID levels. 

The pandemic savings and government support payments for individuals were used to buy goods and unleashed a wave of inflation. That inflation was also exacerbated, thanks to supply chain issues due to COVID restrictions and a shortage of workers. 

Demand for goods has greatly surpassed the ability to produce and deliver those products. As a reader of this column, you may know that inflation is the greatest threat to your portfolio, as well as economic recovery. 

We have robust economic global growth. We have inflation needing to be tamed by natural economic forces, or by central banks that are set to raise rates, to cool the economy. 

Stimulus from government support programs is also being removed over time. The big question will be: Can the economy stand on its own two feet? 

Experts suggest that the virus is never going away. But we are quickly moving to the endemic stage. 

It was early December 2021 when I suggested we were likely entering the end of the pandemic stage. That was an early and hopeful call.

“On the other hand, the Omicron variant may pose no threat, or it might be the status quo on the pandemic front. Or, this prolific variant (it has more mutations than other previous variants) might pose a real threat. If it can evade vaccines, we might be somewhat starting over. At the other end of the spike protein spectrum, Omicron may be the best thing that has happened during this pandemic.” 

Positive COVID case numbers are coming down sharply, hospital numbers are starting to decline and restrictions are being lifted across Canada. 

Incredibly contagious and somewhat less dangerous, Omicron accelerated the move to the endemic stage. Let’s pray and hope that another variant does not come along to spoil the roaring ’20s party. 

I am not surprised by this move from a pandemic to an endemic. I read and shared the playbook early in 2020. How does the pandemic end? With a cold. 

The earnings parade continues, with many Canadian companies pitching in 

Earnings in the U.S were humming along nicely and giving the S&P 500 and Nasdaq a nice bump this week after a soft and choppy performance last week. 

On Tuesday, we saw very strong numbers from Google’s parent company Alphabet (GOOG). Google continues to be a giant tech juggernaut. There’s nothing like a company in a monopoly situation (specifically in online search). They also announced a 20 for one stock split to make shares more affordable. 

U.S. energy companies have been gushing with profits. Revenue at Exxon Mobil (XOM) jumped 80% year over year. ConocoPhillips (COP) beat earnings estimates and increased its dividend by 50%. 

And then along came Facebook earnings—er, make that Meta. (You’ll find a Meta mention and tweet in that link). On Thursday, February 3, 2022, Meta reported earnings that disappointed. I saw it referred to as an earnings faceplant—ha! 

“Meta is down 20% in premarket trading after a decline in daily active users, a revenue warning and worries about its metaverse business. The selloff is erasing about $180M in market cap, nearly the whole market cap of Netflix.”

That bad aura started to spread to the rest of the market. Perhaps that aura even spread to the stock market in the metaverse. 😉 

The tech-heavy Nasdaq Index (QQQ) was down 3% on Thursday January 3, 2022. Below, you will see the one-month chart for S&P 500 (IVV) trying to fight back this earnings season. 

Canadian earnings help with the February blahs 

Thanks to Dan Kent, partner at Stocktrades.ca for this overview of a few key Canadian stocks. (All earnings are reported Canadian dollars.)

BCE (BCE) 

Bell reported strong earnings. Revenue of $6.2 billion was right in line with estimates, and earnings per share of $0.76 came in $0.03 higher than expected. It’s also not a surprise that the company came through with a 5.1% dividend raise for shareholders. The company achieved the best residential net subscriber performance in more than a decade. And its expansion efforts are going well, with the ability to now offer mobile 5G to over 70% of Canadians. Telecom earnings are far from exciting. Considering the economic moat and market share the Big Three (BCE, Rogers and Telus) have, it’s very rare to get something out of left field. It’s simply steady as it goes for BCE.

Aritzia (ATZ)

The company posted earnings per share of $0.61. That was well above analyst estimates of $0.404. The company also posted revenue of $453.32 million, exceeding expectations by 23%. Aritzia is the fastest-growing retailer in the country, seemingly finding the sweet spot when it comes to pricing and quality. On a trailing 12-month basis, the company posted top-line growth of 52.8% and increased net income seven-fold. It will be very interesting to see if it can keep this trajectory, primarily fueled by an expansion into the United States, a market that offers incredible growth potential. 

Lightspeed Commerce (LSPD) 

It reported earnings that topped estimates in terms of revenue, net income and earnings before interest, taxes, depreciation and amortization (EBITDA). Lightspeed Commerce has been heavily scrutinized by analysts and short-sellers. It not only grew revenue by 155% year over year, (70%~ of it being organic growth) but it also bumped its fiscal 2022 guidance. Losses as a percentage of revenue declined, and the company announced a new chief executive officer. Dax Da Silva steps down as CEO, taking a lower role but he will still be very involved with the company. Profitability has been an issue, and it looks like we’ll be getting some guidance on the path to it next quarter. Acquisitions will slow in 2022, and I will be interested to see how this one performs in the midst of a massive tech selloff.

CN Rail (CN) 

CN Rail posted earnings of $1.71 per share and revenue of $3.75 billion. Both topped estimates of $1.53 and $3.66 billion, respectively. More importantly, the company increased its operating ratio to 57.9%, a 3.5% increase from the previous quarter. And it delivered record free cash flow of $3.29 billion. This is likely why the company was able to come through with a 19% increase to the dividend. The company also appointed a new CEO and settled its long-standing dispute with TCI Fund Management. The company is targeting $4 billion in free cash flow over the next year.

Looking back on the “January effect”

In the first post of 2022, I looked at the “January effect” for stock markets. As goes January, often goes the year. From that post with stats from DataTrek: 

“The S&P is usually positive during January (over 60% of the time) and generates a much better return during these years with positive returns in the first month of the year. The difference is remarkable with an average annual return of +15.5% in up years, versus +2.2% in the down years.” 

We certainly had a terrible month for U.S. stocks. The S&P 500 was down by 5.3%. The Nasdaq was within a hair of its worst January ever. Of course, anything can happen from today, but we’ll certainly circle back year end to see if there was a January effect in 2022. 

So, just for market fun, what happens after a bad January? 

The below data are courtesy of DataTrek. Given that the S&P performed especially poorly this January (4th worst since 1980), here’s how the index did in the February directly following the top five worst January returns over the last four decades, prior to this year:

• 2009: January (-8.6 pct) and February (-11.0 pct)
• 1990: January (-6.9 pct) and February (+0.9 pct)
• 2008: January (-6.1 pct) and February (-3.5 pct)
• 2000: January (-5.1 pct) and February (-2.0 pct)
• 2016: January (-5.1 pct) and February (-0.4 pct)
• Average: January (-6.3 pct) and February (-3.2 pct)

The Russian risk 

When I kicked off the year with this column, I looked at the major risks in 2022, as per Charles Schwab. Political risk was listed at number five. 

Those political risks might be growing in the early months of 2022, as Russia looks ready to invade Ukraine. That invasion appears quite likely as Russia has amassed over 120,000 troops on the border. They have set up military hospitals. This is a fighting army and not a political bargaining chip, experts say. 

It’s quite possible that Russia will invade Ukraine and march to Kiev to install a puppet government. This is a localized event (for now) and any risk might be short lived. 

But there’s no guarantee. 

Many experts think that Putin is looking to redraw the map in Europe and expand the borders and the influence of Russia. The political and economic risk could spill over from Ukraine. 

The portfolio risk

While the risk to life and property of those in Ukraine is the greatest concern, we might be able to predict the movement of certain assets during this time of strife. Gold and energy might soar if Russia invades Ukraine. Gold may prove itself—once again—to be the ultimate safe haven asset. 

Interestingly, from that post, Russia has been acquiring large amounts of gold. Maybe they are hedging the financial risks of their own invasion? 

In the Financial Review, there are four things to suggest that Russia may not invade Ukraine. 

Of course, as is the case with the direction of stock and bond markets, no one knows with any certainty how this will play out. But it reminds us that great risks are ever-present. 

I sleep well at night, knowing my portfolio has a modest gold lining. 

Dale Roberts is a proponent of low-fee investing, and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge for market updates and commentary, every morning.

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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