September saw volatility return to financial markets as daily new cases of the coronavirus trended upwards, and fears of rolling back reopened economies increased. Yet, despite the bout of volatility, Q3 has brought another quarter of positive gains.
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 30 September 2020.
The story of the rebound in financial markets has been stimulus. Central banks are ensuring that cheap credit is accessible and that the banking system remains liquid; they’ve even modified their mandate to be able to implement aggressive policy actions for longer. In addition to central bank actions, many governments have extended benefit payments to people whose employment status has been affected by the pandemic.
Although the quarter finished positively, September brought negative performance across equities. This is normal as markets are constantly adjusting their forecasts about the future. Much of the volatility during the month could be attributed to specific sectors, such as technology; having a mix of assets in your portfolio that are unrelated to those volatile sectors can create diversification benefits.
Just as we’ve seen a rebound in the price of financial assets since late March, we are also seeing a rebound in economic indicators. Consumer spending and sentiment has been on the rise recently. This is a crucial indicator as consumers make up 50% of the Canadian economy and 70% of the US economy; it implies that the pace of the recovery will be largely governed by household incomes and sentiment.
Historically in the period leading up to an election, it is common to see increased volatility that tapers off in the months afterwards. Due to the unprecedented nature of this year’s election, we certainly expect to see volatility even after votes are cast as there will be a significant lag between when votes are collected (elecontronially and via mail) and when a president is announced. Further delays and uncertainty could arise if there is a contested result.
Being cognizant of this information is important as an investor so that we are prepared for increased volatility. We can also remind ourselves that fundamentals (policy actions, profitability, economic trends etc.) drive markets, not an over-hyped news cycle.
Just as financial market fundamentals drive market performance, sticking to investing fundamentals will be the key to keeping a sound mind and reaching your financial goals. The fundamentals of managing your portfolio include having well-defined goals, revisiting your goals to see if anything has changed, having a strategic asset allocation, and establishing clear portfolio rebalancing rules. These principles are core to our portfolio management process at Invisor, allowing us to stay focused and force discipline.
Now that we’re well into fall, we hope you have ample opportunity to enjoy the changing colours and fresh air before winter settles in. The weekend ahead looks like perfect weather for it! We wish you a happy and safe Thanksgiving!