Weekend Reading: Dead Cat Bounce Edition

A dead cat bounce is a temporary resurgence in stock prices after a substantial fall. The phrase originated on Wall Street, derived from the idea that “even a dead cat will bounce if it falls from a great height.” 

That’s what investors saw last week as stock markets rallied for three days before slumping again to close out the week. Here’s what the S&P 500 and TSX Composite Index looked like over the past three months:

S&P500 and TSX 3 months

At its low on March 23 the TSX was down an incredible 34.2 percent – with most of the damage coming in just a one-month period. The S&P 500 hasn’t fared much better, down 30.75 percent over the same period. 

Investors who panicked and sold at the bottom missed out on this brief rally. As swiftly as markets have fallen, prices can rise just as fast. Look no further than March 24, where the TSX surged nearly 12 percent in a single trading day.

But the dreaded “dead cat bounce” theory surfaced Friday when stocks fell again by 5 percent. It seems we’re not out of the woods yet.

As you can imagine, I’ve received a lot of questions from readers and clients about the current state of the market. Here’s what I know:

Honestly, no one knows what happens next. Markets fell so fast and so quick. It’s unheard of to see a 30+ percent drop in one month. For perspective, the worst month of the financial crisis only saw a 14 percent decline.

Many are saying the worst is yet to come because North America hasn’t reached the peak of the pandemic and job numbers are going to look awful. But you could easily argue that the market knows this already and bad news is already priced in. Who knows?

I wouldn’t be surprised if markets fall another 10-20 percent. I also wouldn’t be surprised if we’ve reached the bottom and markets start to stabilize.

Stick to your plan, and rebalance if you can. Mind your personal finances and ensure you have enough cash (or income) to survive the coming weeks and months. Consider delaying any large expenditures planned for the year. One client planned to build a garage this year – that project has been moved to 2021. Perhaps you can divert money earmarked for travel to go into your emergency fund instead.

Much has changed since I shared my 2020 financial goals. Next week I’ll share with you how I’m managing our personal finances and investments through the COVID-19 crisis. Hopefully it gives you some ideas to consider for your own financial plan.

Until then, stay well and stay home!

This Week’s Recap:

Falling interest rates have forced many banks to lower their rates on savings deposits. This week I compared high interest savings accounts to GICs to determine where savers and investors should park their cash.

From the archives: Using annuities to create your own personal pension in retirement

The latest Bank of Canada interest rate cut took its key lending rate down to 0.25 percent. The banks have passed along the decrease to their own prime rate – which means our variable rate mortgage just fell to an unheard of 1.45 percent:

Promo of the Week:

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Get your free credit score here.

Weekend Reading:

An important read – Credit Card Genius explains how to protect your credit score during the Coronavirus pandemic.

Exchanging credit card points for gift cards is typically a poor financial move, but Barry Choi argues that using your points to help pay your bills or expenses might be an excellent idea in challenging times.

Zoom Video Communications stock (NASDAQ: ZM) is thriving as employees are working from home and using its technology to stay connected. Zoom Technologies, a Chinese holding company, has also seen its shares spike as investors confuse the two Zooms.

Rob Carrick says banks are trying for a kumbaya moment with their virus response. Can you trust it?

“When banks are e-mailing to say they’re here to help you through this crisis, you might expect at least a touch of self-sacrifice.”

A Wealth of Common Sense blogger Ben Carlson shares a guide to surviving your very first market crash.

Michael James writes a thoughtful response to a reader asking what to do about the stock market crash.

Preet Banerjee has put together a list of free financial consultations and resources for people in need during the Coronavirus pandemic:

Please give Preet a follow on Twitter and on Instagram as he has been diligently putting together helpful videos to explain the Canadian Emergency Response Benefit, and the new temporary wage subsidy (among others).

How the humble GIC goes from schlub to stud in just four weeks as stocks tumble.

Half Banked blogger Des Odjick shares how she’s managing her money during the COVID-19 chaos.

Ben Carlson also shares how he’s managing his own money through the crisis.

Wise words from My Own Advisor Mark Seed, who says there is no perfect personal finance plan to combat something like this.

Nick Maggiulli writes about buying during a crisis – a new framework for investing amid financial panic:

“There is a silver lining for investors who are buyers of equities right now.  Every dollar they invest in the current market environment will grow to far more than one invested in months prior, assuming that the market eventually recovers.”

Along the same lines, writer Chris Taylor says, if you can, increase your retirement contributions right now.

Pandemic personal finance update: Three things you can do right now to defend your family finances.

While market crashes can be seen as a positive for those in the accumulation phase, it’s a different story for retired folks. Here’s how the market crash impacts retirees.

Finally, the Irrelevant Investor Michael Batnick explains how to fight hindsight bias.

Stay well, everyone!

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14 Comments

  1. John Hanlon on March 28, 2020 at 12:50 pm

    Robb–you mention we should rebalance if we can. But why rebalance now? I worry that if I do so now–in these times of market turbulence–that my newly rebalanced portfolio would soon become unbalanced, and I’d have to rebalance again, and again.

    • Robb Engen on March 28, 2020 at 2:38 pm

      Hi John, when it comes to rebalancing your portfolio you should take a rules-based approach to avoid having to exercise your judgement about the direction of the market.

      For instance, if your target asset mix is 60% equities and 40% bonds then you might want to rebalance every time your allocation to stocks drifts up or down by 5%. True, this ‘threshold’ based approach would have you rebalancing often in turbulent times like this – so ideally if you go this route make sure you use a broker that doesn’t charge commissions on ETF purchases.

      You could also take a ‘time’ based approach where you rebalance once a quarter, twice a year, or just once annually. This may be the preferred option if you don’t want to constantly pay attention to your portfolio. However, this approach is not optimal since your allocation can vary wildly in a short period of time – potentially leaving you with a more risky or more conservative portfolio for long stretches of time.

      Finally, this is why I recommend using an asset allocation ETF like VBAL, which is constantly rebalancing every day behind the scenes at no cost to you. You’ll always maintain a 60/40 allocation without having to do any of the monitoring or rebalancing on your own. VBAL is down just 12% in the last three months.

      There’s a reason why rebalancing is called the only free lunch in investing. You’re forced to sell what’s gone up and buy what’s gone down – which should improve your returns over time.

      • John on March 28, 2020 at 4:11 pm

        Thanks Robb. Much obliged.

  2. Sandi on March 28, 2020 at 1:32 pm

    I have been telling my adult kids, that there are 2 financial lessons to learn from this economic crash. You touched on the first, very important to have an emergency fund and the second, is the old adage, don’t put your eggs all in the same basket. Looking forward to your next post.

    • Robb Engen on March 28, 2020 at 2:41 pm

      Hi Sandi, that is sage advice. The double-whammy would be someone who is 100% invested in their own employer’s stock. What happens if he or she gets laid off AND their employer’s stock price has dropped by 30% or more?

  3. Alan on March 28, 2020 at 2:31 pm

    It seems unfathomable that businesses can remain closed past the end of April. The economic carnage will be unrecoverable for many SME’s. Big business will soldier on in relatively good shape with government assistance. If business doesn’t reopen until July then my concern is that we will see 1929 era depression conditions and governments won’t be able to print enough money. Having said that I believe that North America will be open for business by the end of April in some form as we have the benefit of learning from the Chinese and European experiences as well as lower population density. The economic and human demand to get back to work will be difficult to suppress past the end of April is my thinking.

    • Robb Engen on March 28, 2020 at 2:50 pm

      Hi Alan, this entire situation seemed unfathomable – but here we are. Hard to say what happens next. I think we need to prepare for any and all possibilities, including the idea that we may re-open in some capacity later this spring, but then have to shut down again in the fall if there’s a second wave of infection.

      The trouble is, if a vaccine isn’t ready to be deployed until Sept 2021, and the virus remains a global threat, then we’ll need to continue this dance for many more months to buy time for our health system and limit deaths.

      Hopefully it doesn’t come to that, and at worst we’ll have to deal with the economic fallout of being shut down for just a few months.

  4. Gin on March 28, 2020 at 3:35 pm

    Re-balancing by computer algorithms, adding equities to model portfolio’s to achieve weightings as a result of falling stock prices could be an automated form of ‘bouncing the dead cat’ as well. As you say, who knows what will happen.
    In the meanwhile, check out Tangerine GIC rates. Current rates are from 2.60 % for 270 days up to 3.20 % for a 5 year GIC. Unheard of in today’s banking.

    • Robb Engen on March 29, 2020 at 10:08 am

      Hi Gin, rebalancing is a must in any environment – otherwise you’re engaging in market timing.

      And while GICs can and should play a role in a portfolio, I would not advocate for selling equities to buy short-term GICs. If you already have cash on the sidelines, so be it.

      • Gin on March 29, 2020 at 10:13 am

        Hi Robb,

        To clarify, I wasn’t advocating purchasing GIC’s.
        The GIC comment was totally standalone, just taking note of these GIC rates in this environment. We know high interest savings accounts have been hit hard with interest rate cuts over the last while.

  5. Christine on March 28, 2020 at 6:02 pm

    Hi Robb, I love it when you include female voices in your Weekend Reading. Please continue to do so as the personal finance sphere can benefit from diverse points of view.

    • Robb Engen on March 29, 2020 at 10:10 am

      Hi Christine, thanks! Who are some of your favourite female voices in personal finance?

      Some of my favourites include Erica Alini at Global News, Ellen Roseman, Des at Half Banked, Bridget at Money After Grad, Alyssa at Mixed Up Money, and for U.S. readers The Financial Diet is also a good one.

  6. James on March 28, 2020 at 9:41 pm

    Hi Robb,

    C$ fell a quite bit because US$ shot up and crude dropped like a rock. If C$ stayed where it was, could VEQT fall more than it is now? Did falling c$ help VEQT a bit?

    • Robb Engen on March 29, 2020 at 10:21 am

      Hi James, the falling Canadian dollar does help U.S. and international investments since they can buy more C$ when converted back into our currency. Since VEQT is ~30% Canadian and ~70% U.S. and International, it certainly benefited from the falling Canadian dollar.

      If we look at its three-month performance compared to the TSX, you’ll see that VEQT is down 19.89% while the TSX is down 25.64%. VEQT has also performed slightly better than the S&P 500 over the same period.

      For those who are interested in visualizing the effect of currency on their investments there’s a great post on Visual Capitalist: https://www.visualcapitalist.com/currency-fluctuations-impact-canadian-investors/

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