After three quarters of mostly slow and steady growth, October saw a correction in global financial markets with volatility doubling from its September levels. The S&P 500 fell by 6.8%, emerging markets were down 5.7% in CAD terms, while Canada was the biggest loser down 7.4%. Despite the risk averse sentiment, fixed income markets were also down by month end due to rising interest rates.
What’s Going On?
While there’s no clear catalyst for the sell-off, there is certainly no shortage of headwinds, including concerns regarding the health of the global economy, a trade spat between the world’s two largest economies, emerging market debt concerns due to a rising US dollar, and monetary tightening. Combined with the fact that we’re entering the 10th year of an expansion, investors have appeared to be easily excitable.
It’s important to note that corrections are a sign of a healthy market. Risks are re-evaluated and prices are kept in check, rather than turning into a bubble. We expect volatility to continue to be present in the marketplace, especially as the trade war between China and the US continues to work itself out.
Despite the recent selloff and tailwinds from recent tax cuts starting to wind down, fundamentals are still strong in the US. Wages are growing, consumer spending is up, solid GDP figures are being reported, unemployment is low, and corporate earnings remain strong with 80% of companies reporting earnings beating their estimates.
Little progress has been made in the ongoing trade war between China and the US during October. Markets will be paying close attention to Presidents Donald Trump and Xi Jinping’s meeting at the G20 summit in Argentina in late November to see if any progress will be made.
Another important event in the US is the November 6 midterm election where a split congress will make radical policy changes less likely.
As expected, the Bank of Canada raised interest rates in October continuing their progress towards the longer-term goal. We mentioned earlier the 10-year expansion in global markets; what is surprising is that Canada hasn’t participated in the global growth. Today, the TSX is trading around 2008 levels drawing pundits to coin the last 10 years the lost decade. This illustrates the need to avoid the phenomenon known as home country bias and over-allocating your portfolio to your country of residence. In our effort to build fully diversified portfolios here at Invisor, we’ve avoided this bias, which has helped to bolster better performance through Canada’s poor growth.
A Word on Volatility
During times of turbulence in the markets it’s extremely important to remain level-headed and to be cognizant of another risk that is often ignored: investors themselves (as they often get shaken out of the market at the worst time, and effectively ignore a basic rule of buy low and sell high.) Panic-driven selling is a good way to ensure that your losses stay losses. Another interesting note is that bear markets have been historically shorter than bull markets.
As an investor it’s important to remember your time horizon and ask yourself how much cash you will need over the next five years from your portfolio. Try your best to tune out the headlines and remember that volatility is inherent in investing, which is why portfolio diversification is so important. Like many aspects of life, it’s important to be patient and you will likely be rewarded for that patience.