John Hood, president and portfolio manager at J.C. Hood Investment Counsel
Focus: Options and ETFs

MARKET OUTLOOK

Don’t confuse the economy with the market. Despite massive layoffs and a looming recession, on Monday and Tuesday the S&P 500 bounced 140 points to 2,700 before sagging in late trading to 2,642. This surge shoved aside pessimists, with the news or perhaps the wishful thinking that COVID-19 was beginning to ebb.

Any market prediction is compromised by not knowing when the virus will peak and its duration. Nevertheless, we do know three things:

1. The recession we are entering is not the result of markets like in 2008, but rather forced lockdown policies which can and will be reversed in stages, if not quickly. The hospitality industry is the last in line.
2. The U.S. government is providing massive liquidity, bailing out businesses, assuming debt liabilities and mailing cheques to 170 million Americans. The problem is that governments can’t do this indefinitely because, as Brian Ashbury at First Trust argues, the economy will atrophy and become increasingly difficult to recover. Governments need an unlocking strategy to open businesses with lower risk.  McKinsey Global suggests a regional response matrix, with governments choosing some “hot areas” to be avoided while there are fewer restrictions in other areas.
3. This truly black swan event demonstrates that if you do not have a strategy for dealing with volatility long before it becomes an issue, you are like the deer in the headlights trapped between fear of moving and a panicked gallop into the woods.

So what now? Based upon Sam Stovall’s prediction and my own experience in dealing with volatility, I estimated that the S&P 500 would try to find a floor around 2,400 points. So far, that has held and been exceeded. However, a second down leg is not unexpected.

I sold all bond ETFs a few days before this “safe harbour” cracked and then used a measured percentage of cash to buy in at lower prices. This strategy is tempered by the fact that many clients rely upon RRIFs and investment income. Therefore, much of our buying activity has focused on Canadian banks and dividend growers in the U.S.

UPDATE

All bond ETFs (HFR, ZST, XSC and ZAG) were sold in early March. XEG was sold at $8.08 in late February and recently repurchased in late March at $2.91. We sold in all personal, firm and client accounts.

TOP PICKS

VANGUARD U.S. DIVIDEND APPRECIATION INDEX ETF (VGG TSX)

BMO COVERED CALL CANADIAN BANKS ETF (ZWB TSX)

CASH

PAST PICKS: APRIL 2, 2019

BMO EQUAL WEIGHT U.S. HEALTH CARE ETF (ZUH TSX)

• Then: $54.21
• Now: $53.23
• Return: -2%
• Total return: -2%

FIRST ASSET MORNINGSTAR NATIONAL BANK QUEBEC ETF (QXM TSX)

• Then: $21.03
• Now: $16.65
• Return: -21%
• Total return: -20%

BMO COVERED CALL UTILITIES ETF (ZWU TSX)

• Then: $13.50
• Now: $11.58
• Return: -14%
• Total return: -8%

Total return average: -10%

WEBSITE: www.jchood.com