Now that August has ended, we’re reflecting on a truly remarkable moment in financial market history: the S&P 500 has set new records during the month amidst an ongoing pandemic. More evidence of an economic recovery has been showing up in the data, but there are of course still sources of uncertainty present. We continue to believe that investors who remain cool headed and un-emotional will be well-served as we progress.
Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index based on end-of-day data for the Total Return Index as at market close 31 August 2020.
Why Has Performance Been So Remarkable?
Much of the performance can be attributed to the extraordinary policy actions taken by central banks and governments. This can be seen by examining economic indicators such as labour market activity, manufacturing sector activity, retail sales, and consumer spending to name a few that have seen significant improvements. The long-term implications of such policy actions could be increased taxes and higher inflation, however in the present they are serving their purpose and sparking investor optimism.
Another important development during August came when the US Federal Reserve announced a change in strategy. Fed chairman Jerome Powell stated that target inflation of 2% should henceforth be an average, rather than a static, target. This will grant the Fed more flexibility to pursue expansionary policies for longer periods of time when they think it’s needed during times like the present.
These two market narratives – that the market is perceiving a recovery that is underway, and that policymakers are acting quickly and aggressively – are driving positive sentiment.
What Risks Are Being Factored into Market Sentiment?
Although a recovery is underway markets are still facing many headwinds, as there are a number of factors that can cause an uptick in volatility as we progress towards the end of the year.
We are just around the corner of a US presidential election with Wall Street pricing in a Biden presidency, however there is still time for momentum to shift. Markets are looking to the fall and are hoping that social distancing policies will be enough to avoid a second wave. There are also concerns about the effectiveness of potential vaccines as the disease may have different strains. And once there is a vaccine, questions remain surrounding mass production as well as distribution. However, on the opposite side of the spectrum, we have seen advancements related to testing as there are now tests with improved detection. Biotech companies continue their clinical trials of vaccine candidates and daily cases in the U.S, while still elevated, have come down from their peak in July.
What Does this Mean for My Portfolio?
If your portfolio has been constructed and allocated to a specific goal and that goal has not changed, the most important thing for you to do is to make sure your emotions don’t get the best of you.
From our perspective, when securities get too cold that signals to us that we should buy, and when they heat up, we should sell the excess growth and bring it back to target in order to maintain discipline and stay in line with our strategic allocations. This is exactly what we have done throughout the pandemic using the automatic portfolio rebalancing process we employ for all our clients. You may have noticed within your own accounts that around March we were buying equities with a focus on the US; now that the US market is back to breaking records, we have sold a portion of the US positions. Another powerful tool you could employ to meet your financial goals is the use of pre-authorized contributions. They are great way to follow discipline by automating your investing and tuning out market-related noise.