This is truly a raging bear market. Personal investment portfolios have fallen 44% in the US from January to October of this year. How is that affecting Canadian investments? How did the indexes fare? What is stopping growth stocks from growing?
Join Senior Financial Advisors Rob McClelland and Mike Connon to hear the answers to these concerning questions and more.
Transcription
Rob (00:00):
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management and this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing some dramatic investment losses that have taken place. Mike, the headline said that personal portfolios in the US fell 44% between the beginning of January and October of 18th of this year.
Mike (00:31):
Pretty scary number, isn’t it?
Rob (00:32):
That’s a big number. That’s up there with a ravaging bear market. That’s a market crash for those investors.
Mike (00:40):
And that’s data compiled by JP Morgan Chase. And really, the first thing I took from it is 44% is the personal side. So there’s been a big difference between your personal investor and your retail and institutional investors because we know the markets aren’t down that much. So obviously losses are coming more on the end of the individual investors than on the institution. So that’s the first lesson and it goes in this article to talk about how personal investors have tended to always push more toward growth investments. And it’s always been the nature. And we’ve seen that. In the past whenever no one’s ever left their portfolio to try a wild value strategy, right?
Rob (01:22):
No.
Mike (01:22):
It’s not something people do. People stick with their portfolio, then all of a sudden they have the idea, no, no, I want to try something when the markets are flying, going to growth strategy. So we’ve seen that’s what personal investors like. Institutional investors tend to love the value idea. They’re always pushing toward value and big difference in there.
Rob (01:38):
I think what’s interesting, if you look at the retail investor, look in the US and some of the robo advisors and the one app called Robinhood that had done a great job during the pandemic promoting on your phone, you can buy stocks, you can buy Bitcoin and everything. And so investors started, small investors, mind you, started to buy these things and driving up stock prices. The average account at Robinhood about $5,000. So not a lot of money there, but there’s millions of them. In Canada, we had companies like, well Simple offering the same sort of thing. Easy, you can do it on your phone, you can buy and sell stock on your phone and if you work hard you can become a millionaire overnight was the story.
Mike (02:25):
It’s a great idea and you’ve seen stocks and things peak from that type of activity. It was funny when was looking at it, I want to see what the actual numbers are because 44% was a bit of a shocker. So I want to see how the indexes did. And I don’t know when this podcasts going to be released, but-
Rob (02:43):
This is as of October 18th.
Mike (02:45):
Yeah, so this is approximately where the markets are. Right now, the S&P 500 is down about 20%, right? NASDAQ is down pretty close to 30%.
Rob (02:56):
So what is the NASDAQ?
Mike (02:57):
NASDAQ is North American Stock Index. A lot of the growth companies over the years have placed themselves in the NASDAQ. So they’ll end up in there. A lot of the high flyers from-
Rob (03:09):
The technology companies, things like that.
Mike (03:11):
Apple was one of the darlings of the NASDAQ originally and some companies like that. So that’s what the NASDAQ’s built in. S&P 500 is the 500, I’d say biggest companies in the US is the easiest description of them. So that includes everything from oil and gas companies to banks to the high tech companies can be in there too. And some of the companies can be in both too. So it doesn’t mean if you’re just in the NASDAQ, you can’t be the S&P 500, I believe.
Rob (03:36):
Correct.
Mike (03:36):
Yeah, they can cross over.
Rob (03:37):
It’s just an index.
Mike (03:38):
It’s just an index. So the TSX, Toronto’s been reasonable compared to the rest of the world. Toronto’s down around 10% at this point. But we’re an oil rich nation and our banking system is still pretty superior to the rest of the world. We’ve actually held up okay in Canada. Next thing I went to look at is Europe and Asia. And this was a surprise, I started to research on Europe and Asia because when you look up indexes, a lot of times they’re giving you the returns in their own currency. And when I looked at Europe and Asia, they looked a lot better than they do on our statements. I thought, geez, they’re only down 12, 13%.
Rob (04:14):
On our statements, they looked like they’re down 20.
Mike (04:16):
They’re down 20. So I kept on doing some research, then I looked at what the Euro has done compared to the Canadian dollar and we find there’s been a big slip in the currency. The Euro has had a 7% slide to the Canadian dollar. So again, when you invest into Euros, it’s not only how their stock market does, it’s how their currency does too. Because when you look at someone’s statement, you have to realign everything to Canadian dollars to say if they made money or not made money. When we look, this is a funny stat. We looked at the world in US dollars and the world in US dollars is down about 22.4% right now. When you look at the world in Canadian dollars, it’s only down 15.6%. So it’s actually good to be in Canada.
Rob (05:00):
One of the reasons, even though our currency is down versus the US, but our currency’s still done relatively well to other currencies around the world except for the US.
Mike (05:12):
Yeah, we always compare ourselves to the US. We never compare ourselves to anyone else. If you go into currency, US has gained 7.7% on Canada this year. So that means if you have a US stock, you’ve got about a 7% bonus by price in the Canadian currency. But in Europe, if you have a European stock, you’ve lost in addition 6.1% on Canadian currency. So we’re in the middle being in Canada, we’re between the US and Europe, we’re somewhere between them. But if you’re living in the US right now, you’re not going to like Europe at all because if you invest in Europe in the US, you take that 7.7, 6.1, what do you get? 13.8%. So there’s a 13.8% difference between the Euro and the US valuations of a stock.
Rob (05:59):
So I think one of the things that’s interesting about this is we’ve talked a bit in previous podcasts about how this bear market got started and it started with the COVID. Then we had the war in the Ukraine with Russia invading the Ukraine and the market becomes unstable and we start to get high inflation. But really the thing that stopped the growth stocks from growing wasn’t either one of those. It was the raising of interest rates. So people were leveraged again, we talked about that, leverage plays a role. People were leveraged, even if they had borrowed a little money, they were leveraged and they were holding these stocks that were way overvalued. Now interest rates are going up. They want to pay off their debt. When you raise interest rates, you’re actually taking money out of the economy because people need to put that money somewhere else. They need to pay down debt. They can’t go out and spend that money anymore. If your mortgage has gone from one and a half to four and a half, that 3% on a million dollar mortgage means that’s $30,000 that you can’t spend anymore. That’s huge.
Mike (07:06):
That lowers the demand, right? It’s supply and demand. So if you lower the demand out there, supposedly inflation should start to yield a bit to that. And it’s funny, when you look at currencies too, you look at what’s going on between the US, we always hear about raising interest rates and which government’s going to, the Fed when they come out, they go is 0.5% or 0.75%. Remember they can’t do nothing. Because if all of a sudden in Canada we stop raising interest rates and the US rate was raising interest rates, do you know what happened to our dollar? It would fall apart, right? Because people always look at the country. I always think of it this way. They look at the US and Canada, they say, “Which is more safe?” US is a lot bigger of a country than Canada.
Rob (07:47):
10 times.
Mike (07:48):
It’s 10 times. So the only reason I’d invest in Canada, if I was to expect a greater return. Why else we invest in Canada? And that’s where you need to make sure the interest rates are competitive with the US. Otherwise, no money’s going to come to Canada and your currency would drop. And again, if your currency drops, remember it’s not only your portfolio, it’s the buying power of your Canadian money. Because in Canada we don’t make a lot of stuff. So if all of a sudden everybody says, “Who cares about the Canadian currency? My portfolio looks good because our Canadian dollar is dropping.” But when you go to buy goods in the store, you’re going to have mass inflation because in Canada we import, I don’t know the percentage, but a ton of the goods. I don’t know many things I buy in the store that are actually produced in Canada.
Rob (08:29):
If you’re starting to look at going on a trip into the US over the holidays, you’re going with the 70, 71 cent dollar. That’s not good. That’s going to be a very expensive trip for you in US dollars.
Mike (08:42):
Yep.
Rob (08:43):
What’s happened to crypto and bonds? How have they been impacted by all this noise?
Mike (08:48):
Cryptos are down close to 50% in Canadian currency. 49%, that’s it. Well, that’s not cryptos, that’s Bitcoin is down about 49% Canadian. But again, in US dollars, that’s down 57% or something like that.
Rob (09:00):
Yeah, it’s a big number.
Mike (09:02):
It’s a big number. And again, Bitcoin’s the most popular of the cryptos. Ethereum is probably better than Bitcoin at this time, but there is about 50 other-
Rob (09:14):
Hundreds of other cryptocurrencies that are down a lot more.
Mike (09:17):
They’re down a lot more than that.
Rob (09:19):
What about bonds?
Mike (09:21):
Bonds? This is the shocking number. If you look at the yield increase in bonds, the yield since January 1st, the bond yield has increased by 238%.
Rob (09:32):
So we’ve gone from pain and interest, I think of 1.75 to now four and a quarter percent.
Mike (09:37):
Yep.
Rob (09:38):
That’s huge. And we all know if you work at it, you can get even more than four and a quarter percent. Not much more, but you can probably get 5% quite comfortably today.
Mike (09:47):
And remember, the return you got on your bonds is inverse to the yield if you owned a bond then. So that correction is created probably on 5 year bonds, it’s been about a 10%, somewhere around there, a 10% correction. And if you’re going longer term, you’re going to have a higher correction there too.
Rob (10:04):
Yeah. If you’re in a 15 year bond portfolio, you’ve really been beaten up by this rise in interest rates. That brings us to the end of another week. This is Rob and Mike with Think Smart from the McClelland Financial Group of Assante Capital Management reminding you to live the life that makes you happy.
Assante Capital Management (10:45):
You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Limited.
