Volatility persisted into this week, in what has been a tough stretch for many investors. Global markets fell back into correction territory (a correction is a short, sharp, sentiment-driven drop exceeding -10%) mid-week, with the S&P 500 coming close as we type this Friday morning. If you would like our views on this volatility, please, by all means, click here.
If, instead, you need something different—lighter—we hope to fill that need. In that vein, we will start this week with a brief discussion of non-financial things you can do to keep volatility’s angst at bay, a look at the market’s reaction to Canadian pot legalization, a discussion of straw banning and Colorado’s “Damn” bond measure on November’s ballot.
Volatility Survival Guide
If you read MarketMinder, chances are you read financial media in general, which means you are probably well aware of stocks’ rocky week. Such short-term swings often cause investors to react, which can be very problematic, as it isn’t a forward-looking decision taking longer-term goals and needs into account. Stocks’ cumulative long-term returns, which happen to be quite positive, include all these bad and good days. If you look at the S&P 500’s or MSCI World Index’s last month on a chart, it will look like a big bad drop. But if you plot their history as far back as daily data are available, you will see even the worst drops are zigs during a long upward zag. Some of them become practically invisible, no matter how painful they were to endure at the time.
Whew. That was heavy stuff. Sorry. When stocks suffer corrections, we usually counsel readers to take a deep breath and focus on the long term and their goals. But that advice isn’t always tangible. Like, ok, but how do I keep that long-term focus? Sometimes, it is as simple as limiting the amount of short-term noise that filters into your world view. So here are some practical tips to not letting the volatility monster get you down.
You know, reading back on the previous bullet points, we reckon they double as a midterm survival guide. You’re welcome!
MarketMinder doesn’t make individual security recommendations. References to stocks and ETFs in the below are solely to illustrate a broader point and should not be construed as a recommendation to buy, sell, hold, free deliver, gift, smoke or take any other possible action involving them.
Last week, Canada—our beloved neighbor to the north—legalized the recreational use of marijuana, a development years in the making. For those who want our views on the merits of investing in cannabis-related stocks, please revisit Chris Wong’s stellar article from earlier this year titled, “Up…or Up in Smoke?” He really cut through the haze with that one.
But even those delving into Canadian cannabis firms[i] should proceed with caution, which market movement since legalization went live illustrates. Since Canada’s legalization on October 17, the primary ETF tracking cana-businesses (which is 56% investing in Canada, for obvious reasons[ii])—the poorly named ETFMG Alternative Harvest ETF[iii]—is down 23%. (Exhibit 1)
Exhibit 1: Pot ETF Gets Smoked After Canadian Legalization
Source: FactSet, as of 10/26/2018. ETFMG Alternative Harvest ETF price return, 6/30/2018 – 10/25/2018.
Some of this drop is likely tied to the broad global market volatility experienced over this span. But also, a large part is likely the fact investors bid these stocks up massively in advance of legalization, only to sell on the news. It is a little like the inverse of war, when tensions can weigh on stocks—only to reverse course when conflict occurs. It is markets’ pre-pricing mechanism at work! Anyway, even after the decline, these businesses are trading at extremely lofty valuations. Actually, according to FactSet, most of these firms aren’t profitable, meaning price-to-earnings ratios are negative. The ETF’s top three holdings, Cronos Group, Aurora Cannabis and Canopy Growth presently sport price-to-sales ratios of 331.4, 117.4 and 82.7, respectively.[iv] For some perspective, the S&P 500’s is presently around 2.1.[v] That doesn’t mean pot stocks can’t or won’t get higher. But caution seems warranted, as a whole lot of future sales and profits seem baked into these prices.
Insert Puns About the Last Straw Here
This week in green capitalism, The Wall Street Journal highlighted some DIYers who are trying to solve the great Single-Use Plastic problem. They craft alternatives to plastic straws and cling wrap and hawk their beeswax-laden wares at farmers’ markets and on Etsy, and to that we say, huzzah! Capitalism has solved many of Earth’s resource-related problems in the past, and we see no reason why it can’t solve this plastic bugaboo, although the ascent of corn-based plastics that compost within two months sort of has us wondering what the fuss is about. If corn-based plastic bags are good enough for U2 to hand to fans buying t-shirts at concerts, we dare say they are good enough for those plastic straw-haters. Is Bono not the world’s moral conscience, after all?
Anyway, we loved the Journal’s article and its fun descriptions of crafters wrestling with slow cookers, paraffin and canvas totes. If wax-covered cloth can substitute for plastic wrap, great, you get a more colorful fridge![vi] And who doesn’t love a sturdy, reusable grocery bag that can handle a little moisture?
At the same time, in the spirit of ease and frugality, we can’t help but point out that a lot of these things already exist. Does one really need to paint canvas with paraffin in order to get a waterproof reusable sack? After all, there is a nifty fabric called oilcloth. It is the stuff table cloths are typically made out of. It is slick and doesn’t absorb water. Get a couple yards of it, a basic pattern, some bias tape for the trim and matching thread, and you’re good to go. Same amount of sewing as a waxed canvas tote, but far less risk of personal injury when you aren’t wrangling hot wax. As a bonus, you can return your slow cooker or Instant Pot to their traditional use.
Similarly, we sort of question the need for DIY plastic wrap? Glass refrigerator dishes are durable and last forever as long as you don’t have Elisabeth’s penchant for dropping things. Plastic wrap and wax paper are handy in the microwave, but the invention of silicon microwave dish covers solves that problem.
Not that we want to discourage any artisans! We are always happy to let the market decide, and the market could very well decide the marriage of cloth and hot wax is the greatest thing since the bagel guillotine! But we just find it funny that a lot of people don’t seem to realize the market has already solved a lot of these problems.
Colorado’s Salty Infrastructure Proposition
With less than two weeks remaining until voters hit the polls in America’s 2018 midterm elections, intensity is ramping up. This Wednesday, Todd saw no fewer than six consecutive political ads during one local news commercial break, flipping from the “you can’t trust [insert candidate’s name here]” theme to attempts to make favored candidates look as human as possible,[vii] typically featuring folksy themes. Elisabeth has received no fewer than three dozen leaflets in the last three weeks and pities her postman. Suffice it to say, we will be happy when the vote is over and these ads vanish.[viii]
But elections can be fun, too. One thing we find modestly entertaining? Ballot measures! Like Colorado’s Proposition 109. The point of the measure is rather bland. A “yes” vote authorizes the state to issue $3.5 billion in bonds to fund infrastructure projects. What we find entertaining here is the title. It isn’t just a bond measure. It is the “Fix Our Damn Roads” Bond Measure, which is just so salty.[ix] We have been to Colorado a number of times. Admittedly, we haven’t seen every road in the state, but we didn’t notice anything we thought was particularly anger-inducing. Maybe a pothole?
But there is one infrastructure-related thing that is frustrating as heck in Colorado. One thing this bond measure won’t fix. We would be entirely on board with a “Move the Damn Airport” Bond Measure that put Denver International Airport (DIA) within a 45 minute drive of the city. Ok, ok. Maybe that’s too hard, as DIA is big. Perhaps we can compromise: Finance the construction of an onsite rental car area. As it stands now, you fly into DIA, which is built in what appears to be an old farmer’s field, distant from the city. Then you shuttle to a rental car area, which appears to be in … a different, still distant from Denver, former farm field. So, maybe a “Get Your Damn Rental Car at DIA” Measure?
Enjoy your weekend!
[i] Cana-biz, maybe? Or Cana-businesses?
[ii] Source: FactSet, as of 10/26/2018.
[iii] We mean, Alternative Harvest? It is a pot ETF. There is practically an endless number of puns, as our coverage of this subject illustrates.
[iv] Source: FactSet, as of 10/26/2018. Price-to-Sales Ratios for Cronos Group, Aurora Cannabis and Canopy Growth on 10/25/2018.
[v] Ibid. S&P 500 trailing 12-month Price-to-Sales Ratio on 10/25/2018.
[vi] Elisabeth wonders what implications this would have on the Twin Peaks script if it were written today. Would Laura Palmer still be “wrapped in plastic”? Does “wrapped in canvas,” “wrapped in oilcloth” or “wrapped in compostable plant starches” have the same ring?
[vii] This is really hard!
[viii] Well, until next year when we figure they ramp up to ridiculous heights ahead of 2020.
[ix] No word where the “Rent Is Too Damn High” Party stands on this initiative.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.