Chart: Market Recovery vs Past Bear Markets

The coronavirus crash was fast and sharp. It recovered within months – the best recovery when compared to past bear markets.

The speed of the recovery is likely due to the speed and volume of Federal Reserve support, which exceeded all previous monetary stimulus programs.

Some argue that the massive volume of support indicates we are approaching the end game for the credit based system. Others suggest the Fed has learned from previous policy mistakes – namely, underestimating the required magnitude of stimulus. Perhaps if the Fed were more decisive in 2008/2009, the post-GFC recovery wouldn’t have taken so long.

Honestly, there are great arguments either way. I don’t know. But what I do know is the US dollar remains the reserve currency by a wide margin and its status has not been compromised by the recent monetary stimulus. This tells me that the demand for dollars more than makes up for the additional supply.

Some suggest we are in the middle innings of a secular bull market that began around 2014 or so, led by emerging technologies in cloud computing, automation, artificial intelligence and machine learning. Looking at previous market cycles, this is quite possible. In hindsight, we can see that the 2000-2012 period was essentially a sideways market. During that time the S&P 500 price level went nowhere, and it is exceedingly rare that a 12yr consolidation would be followed by another one. It’s more likely a 12yr consolidation would be followed by a secular bull market.

Of course, on a total returns basis the post-2000 experience wasn’t as bad. When including reinvested dividends, the S&P 500 broke even by 2006.

Maybe we’re in a secular bull market. Maybe we’re not. As a dumb and lazy investor I’d rather not try to time the market. Instead, I feel more comfortable, regardless of the market environment, if I own a diversified assortment of businesses that are 1) reasonably valued, 2) will survive the test of time, and 3) reward shareholders with growing dividends and share buybacks.

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Stock Market Performance Under Different Presidents

Historically, stock markets have performed better under Democratic presidents. Causation or correlation?


9 Large Cap Canadian Stocks Trading Below Book Value

There are a handful of large cap TSX 60 constituents that are trading below the book value of their net assets. That means the market value of the company’s stock is theoretically worth less than the liquidation value of the company.

While some investors might look at this as a buy signal, there is more to this than meets the eye. Don’t be fooled: The price-to-book value is largely a useless statistic.

First of all, the price-to-book value for companies with high capital costs (aka asset-intensive) tends to be lower. (As you can see in the list below, several of these 9 companies are in the energy industry.) For this reason, price-to-book values aren’t really comparable across industries. In fact, they’re not really comparable from company to company due to differing accounting practices.

In all cases, what is clear is that book value is meaningless as an indicator of value.

Warren Buffett in Berkshire Hathaway 2000 annual report

Second, a low price-to-book value could be an indication of a sick company. The market may be pricing in a decline in asset prices not yet reflected in a company’s backward-looking financial statements. For example, Brookfield Property Partners is trading at a price-to-book of 0.63. This may be because the market is expecting Brookfield Property Partners’ real estate holdings (i.e. its assets) to significantly decline in value due to a structural shift to work-from-home and online retail. A low price-to-book value could signal poor prospects that are not yet reflected in the company’s financial statements.

Third, in today’s modern economy many companies are built using intangible intellectual capital instead of tangible plant and equipment. This 21st century asset isn’t counted in a company’s financial statements, so modern companies may have under-counted net asset values. For example, Amazon, Microsoft and AMD have price-to-book values of 21.24, 13.20 and 29.06 respectively. While these companies could be expensive, they are also massively more profitable than a company like Brookfield, as judged by ROE.

While some research suggests stocks with low price-to-book value outperform over the long run, personally I prefer not to look at price-to-book as an indication of value.

SymbolCompany NamePrice/BookEPS (TTM)Fwd Div YieldFwd P/EPrice/Sales
CVE.TOCenovus Energy Inc.0.34-1.41-20.080.38
IMO.TOImperial Oil Limited0.5-0.035.52%19.70.42
BPY-UN.TOBrookfield Property Partners L.P.0.63-0.3110.82%2.1
SU.TOSuncor Energy Inc.0.67-3.545.42%27.030.79
MFC.TOManulife Financial Corporation0.761.956.11
CNQ.TOCanadian Natural Resources Limited0.760.038.25%34.671.26
FM.TOFirst Quantum Minerals Ltd.0.86-0.590.09%22.691.79
POW.TOPower Corporation of Canada0.912.696.86%8.280.31
CAR-UN.TOCanadian Apartment Properties REIT0.935.782.94%11.869.46