Is it me or did October look like it finance and the markets were always in the headlines? Friends, family, neighbors, it seems as though it was everyone’s favorite subject. And how could you blame them? Every day, when looking at a newspaper or any news broadcast on TV, the first story seemed to be a big day on the markets (usually a big DOWN day).
So let’s set a little perspective on the month, was it really that bad? Or was this an exaggeration by the media? Let’s look at a few stats:
Biggest intra-month losses (high close to low close):
|
Month
|
Date of High Close
|
Date of Low Close
|
Number of Days
|
High-Low Loss
|
|
October-29
|
10-Oct-29
|
29-Oct-29
|
19
|
-33.69%
|
|
October-87
|
5-Oct-87
|
19-Oct-87
|
14
|
-31.47%
|
|
September-31
|
1-Sep-31
|
30-Sep-31
|
29
|
-30.24%
|
|
October-08
|
1-Oct-08
|
27-Oct-08
|
26
|
-26.88%
|
|
May-32
|
6-May-32
|
31-May-32
|
25
|
-26.60%
|
|
March-38
|
1-Mar-38
|
31-Mar-38
|
30
|
-25.83%
|
|
May-40
|
3-May-40
|
21-May-40
|
18
|
-24.59%
|
|
November-29
|
4-Nov-29
|
13-Nov-29
|
9
|
-22.81%
|
|
October-37
|
1-Oct-37
|
18-Oct-37
|
17
|
-21.57%
|
|
September-32
|
7-Sep-32
|
19-Sep-32
|
12
|
-21.16%
|
|
July-33
|
18-Jul-33
|
21-Jul-33
|
3
|
-20.90%
|
|
April-30
|
2-Apr-30
|
24-Apr-30
|
22
|
-20.53%
|
|
October-32
|
3-Oct-32
|
10-Oct-32
|
7
|
-20.35%
|
See that? October 2008 is the 4th on record and apart from one instance in the famous 1987 market crash, all of the other instances occurred before May 1940..! Amazing isn’t it! So seeing that, you can understand why it made the news, the move was truly remarkable.
And another fact, it did not simply occur over a day or two, in fact, if you look at this graph published by the NY Times, you can see that the occurrence of “extreme day movements” is unlike anything we have ever seen in terms of the number of large movements (4% or more, up or down).
So the next time you see some headline about the markets, the apocalypse or anything of that nature, maybe you will know that it’s not as much of an exaggeration as you might think. Sure, it helps sell newspapers and magazines and to get good tv ratings, but it’s not all bluff.
In fact, it’s been interesting to see a lot of professionals, people who invest for a living, and who do not dare enter the market right now, simply because there is so little that is rational, which makes it very difficult to take a position. You might think that a stock is cheap under fundamental criteria’s only to see it decrease by a further 10-20%. You might make your money back soon, and might even be ready to take the risk, betting on a long term return. But any investor would still be looking for good entry points, and it’s difficult to know how you could determine where that would be….
I guess one of the better points of all of this is that we are all learning a lot of valuable lessons, and since it’s never too late to start learning and improving…
Corporate bonds are safer investments, really….?
You have surely heard this, maybe not in a speculative trading account, but in a RRSP or 401K, it is generally recomended to have a portion of your portfolio in “safe investments”. The basic concept is generally explained as having a more risky portfolio when you are young so that over time you will achieve a higher return. Then, as you age, you increase the proportion of safe investments because if a stock market decline or cash occurs, you will not have as much time to make back the losses and thus not as much acceptance for risk.
The general rule is that the proportion of “safe investments” should be roughly equal to your age. Why do I write “safe investments” between quotes in this article? Because in this current crisis, we are learning a lot about investment and it’s creating a lot of questions about investment and how it should be done.
Why? Simply look at the below graph, UYG is an ETF that tracks corporate bonds. To be fair, it tracks high yield bonds. If you look at LQD, which tracks investment grade bonds (higher quality), their performance has been a lot better (-16% YTD). But still, to many, corporate bonds in general were “safe investments” and I hope that you are not reading this after seeing your retirement fund get crushed because you were holding corporate bonds that did not hold true to their objective (i.e. maintaining their value in a declining market environment). Of course, maybe that only occurs in normal market circumstances and indeed the past few months have not been “normal” by any means. But still, it is good to know and we should now stand as warned.
The blue line in the graph is HYG ETF while the red is the Dow Jones Indsutrial index.
But like most investments, the most important is to not panic. Spreads between corporate bonds and treasuries are in many ways at record levels and as the economy gets better, should improve. It’s not as clear for high yield bonds as some of those will without any doubt suffer from some defaults. Junk bonds (the most speculative bonds out there) currently trade at a yield of almost 19%, a high since such statistics exist. As the Fed and other central banks fight to improve the liquidity of the system, we see an improvement in those lending conditions for corporate companies worldwide.
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