Hello and welcome to The Download. I’m your host, Dave Richardson, and I’m joined for Thurston Thursdays with Stu Thurston Kedwell. I’m glad we’re actually doing the podcast a little bit later in the week, because obviously, if we look at yesterday in the markets, a fairly significant pull back all across the world. Europe in particular, US and Canada. I think a lot of people forget the lead up to the election in 2016. We’re in that final run up to next Tuesday for the U.S. election, but I believe the last nine trading days leading to the election in 2016 were negative. So, it’s not uncommon to see volatility. But we’ve got some other factors that are causing this. Stu, what are your thoughts on the volatility and is this something you expected or anticipated? And where do you see it going from here?
It’s a great question. Expecting volatility? Definitely. Anticipating the exact day? More difficult. We’ve talked for some time about two things going on here. There’s the health care analysis that’s required. Are the cases going up or down? What’s happening to hospitalization? Are there signs of antibodies and a cure, or are there signs of a vaccine? Then there’s the economy, which has bounced back nicely in the third quarter, but still is quite dependent on some government support. So, in the last five or six days, after listening to the US officials — Pelosi and Mnuchin — talk about potential stimulus, those talks broke off. And that seemed to start some of the angst. Then you roll into the election right after and you get some more volatility. Why does the stock market sell off as dramatically as it does in a very short period of time? When you get into a low interest rate environment, we know that it’s conducive to some risk taking and some other behavior. That is not something that we necessarily do, but there could be positions with more leverage, there can be positions that are related to the option market. I saw your podcast the other day on the volatility curve. When these small changes start to happen, they can snowball in a very short period of time, like they did yesterday. I think when we get through the election, that could bring added volatility because we may not get an official result. I do think eventually there’ll be more government support because the capacity to provide the support is there. There is an acknowledgement that more support is necessary. When you think about what they were debating; you had the president side at 1.8 trillion and you had the Democrats asking for 2.2. But one way or the other, you still had a fair amount of money on the table. We didn’t successfully get that stimulus in place now. People worry about a lame duck session if there’s a new president. I think what Americans have shown historically is that they normally get to the right spot. But the process of getting there can be a little bit tough to watch sometimes. Someone asked me yesterday about the TARP package in the financial crisis in 2009. I remember sitting there on a Friday afternoon; they had the bill and they had the votes going up on the screen — this would have been ten or eleven years ago — and it was around 2:30 in the afternoon. And we’re like, holy moly, they’re not going to vote for this thing. The stock market took a dump that afternoon and had a tough start to the next week. Then they did get the TARP in place shortly thereafter. So it’s just not an enjoyable process to watch sometimes, but we think at the end of the day, they’ll get to the right spot.
Well Stu, I think we can all agree that the politics have not necessarily been fun to watch over the last few years. You could probably say that back as far as you want to. Politics isn’t always fun to watch. But speaking of fun to watch, we get a comment here and there from people who listen to the podcast about our talking about range of outcomes and particularly around dollar cost averaging, something we seem to come back to every time, or on many of the podcasts we’ve taped. I know we’re both firm believers in it, in an environment like this. So Stu, maybe you can go about the thinking behind dollar-cost averaging and why you’re a proponent, particularly in an environment like this?
It’s a very good question. Generally speaking, the way I think about things over a very long period of time is that there are, give or take, three market environments that exist at different points of time. There’s one market environment where valuations are low and you’re getting the future at a very discounted price, and in those environments you don’t need dollar cost averaging because the odds are so overwhelmingly on your side that you say this is good enough for me. I don’t care if it goes down a bit more because I’m getting a great long-term potential. Then there’s the odd environment where stocks are very expensive and you have to be very careful during those periods of time because there’s usually an attractive alternative that exists sidecar those stocks, right? If you think back to the tech bubble; the multiple on the S&P 500 was very high. Yet you could also buy a government bond at a very attractive rate. So when the market started to stall, there was a very attractive alternative which then led to a more substantial decline. And then there’s the environment we’re in right now: elevated valuations in absolute terms, but still quite attractive relative to fixed income. We know that it’s likely to be a volatile environment. So when we think about the outcome still being reasonable over time, but taking into consideration valuations, interest rates and volatility, the tool that we reach for in our toolbox during that environment is dollar-cost averaging. I think it’s going to continue to be a pretty valuable tool, just like we’ve seen this week.
Stu that’s a fantastic explanation of the rationale behind that particular strategy. At the front end of the podcast, you highlighted the environment we’re in, which, again, is what makes it such an effective strategy. And another point for listeners: when you send us feedback, we’re paying attention! So let us know what you’d like to hear us talk about, because we can address that when you let us know. Stu, thanks again as always for this fantastic information.