Econ Update_Feb2020

Economic Update: February 2020

by Blake Whiteley Last updated on March 04, 2020 Tags: Market & News Updates

Equity markets fell rapidly at the end of the month and have flirted with a technical correction. From time to time markets will take sharp swings, and the process is usually amplified by irrationally putting more stake in negative news rather than looking at the holistic fundamentals that prices are rooted in.  And behind all the fear driving this volatility, fundamentals remain healthy (especially at these prices) and investors will be well-served by keeping cool and sticking to their plan.

*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 28 February 2020

What is happening?

In short: heightened volatility. Volatility in financial markets are determined normally by the degree of uncertainty that exists surrounding investment opportunities. Therefore, in environments where there is a lot of uncertainty, we’re more likely to see instances of quick pullbacks like we experienced the last week of February, followed by a quick reversal of sentiment driving markets up several percentage points.

What to expect

As humans, we’re prone to bias and flawed decision making under stressful conditions. It’s important to understand that what you see in a headline does not necessarily translate one-for-one to your personal portfolio. For example, if a headline states the Dow Jones is down 3% today, the impact on your portfolio will likely be different. Your portfolio will probably have exposure to assets outside of this 30-stock index, along with exposure to “safer” assets such as bonds, which tend to perform well when equities are falling. Having exposures to currencies such as the USD can also help further dampen volatility during these periods.

Sentiment can guide the direction of markets in the short-term, however fundamentals will prevail in the long-term. Many successful investors follow the mantra of being bold when others are fearful. Take this Warren Buffet quote for example: “To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

What does this mean for you?

As humans, we’re prone to bias and flawed decision making under stressful conditions. It’s important to understand that what you see in a headline does not necessarily translate one-for-one to your personal portfolio. For example, if a headline states the Dow Jones is down 3% today, the impact on your portfolio will likely be different. Your portfolio will probably have exposure to assets outside of this 30-stock index, along with exposure to “safer” assets such as bonds, which tend to perform well when equities are falling. Having exposures to currencies such as the USD can also help further dampen volatility during these periods.

Sentiment can guide the direction of markets in the short-term, however fundamentals will prevail in the long-term. Many successful investors follow the mantra of being bold when others are fearful. Take this Warren Buffet quote for example: “To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

As always, maintaining a disciplined approach as well as a policy of holding a diversified portfolio, investing at regular intervals, and having defined rebalancing rules (sell high, buy low) are a great formula when thinking about our financial goals. If you’re finding yourself getting stressed out by the news, grab a burger, and think of Mr. Buffet.

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