I should be putting the final touches on my Christmas shopping (and so should you) however, considering the ongoing market volatility, I thought it prudent to provide some perspective. I will keep it as brief as possible, as I know everyone is busy.
Both the Dow in the U.S. and the TSX in Canada have now corrected more than -15% and international markets are down more than -20%. The TSX, in fact, is now down more than -1,000 points from where it was over 4 years ago.
It is important to keep in mind that our portfolios at McIver Capital Management are constructed with both specific and ample holdings of cash, bonds, Gold and other negatively correlated positions. They are further buffered by the large percentage of assets held in U.S. dollars; which is strengthening in relation to the Loonie (increasing the value of those assets). These portfolios are, in fact, specifically designed to weather these types of storms and accordingly they have experienced a fraction of the market volatility.
Market corrections are normal, natural and healthy. They prevent bubbles, excess speculation and they moderate expectations. The root of this compression can be found in three areas of concern; the ongoing China – U.S. trade dispute; slowing global growth (primarily in Europe and China); and most importantly the financial markets adjusting to rising U.S. interest rates.
On Wednesday this week, the U.S. Federal Reserve (FOMC) did not help when it raised interest rates for the ninth consecutive time. While the FOMC did suggest that there will only be two more rate hikes in 2019 (instead of the expected 3), they did not indicate that interest rate hikes would cease or that rates would be coming down any time soon. Stock markets (and real estate markets) generally prefer lower interest rates for a number of technical reasons, but primarily because the lower the cost of money, the more of it there is to circulate through your market place.
That said, the cumulative reaction in the equity markets to an unfriendly, rate-raising, U.S. Federal Reserve over the past two months, appears to be overdone. Please keep in mind that there is no evident systemic problem in the economy, such as there was during the financial crisis of 2008. I hesitate to even mention the financial crisis of 2008 in the context of this garden variety correction.
Indicators Suggesting Market is Oversold
With the equity markets well below their highs and the shock of higher rates now baked into future expectations, most indicators suggest that this market is over-sold. Clearly, investor expectations toward major market inputs (Interest rates, trade, Brexit, European growth) have been reduced, setting the stage for a potential positive surprise should one or more of those worries turn positive.
Research suggests that this current decline should have been damaging enough to potentially generate a sharp oversold bounce at some point in the near future.
Last Friday December 14th, the S&P 500 (SPX) dropped 1.9% which was followed by a 2% compression on Monday. Sundial Inc (a research partner of Canaccord Genuity Wealth Management) studied every occurrence since 1950 in which a drop of 1.5%, or greater, of the SPX on a Friday was followed by a 1.5%, or greater, drop on the following Monday. There were 10 such occurrences and in all cases the SPX was higher 2 months later and in 9 of the 10 occurrences the market was higher 1 year later. More than that, the numbers themselves are impressive. The average gain 2 months following was 7.9% and the average gain 1 year hence was 25.7%. In fact, there was only one occurrence in which the return 1 year later was less than 20% (-1.2% in 2001, which was the one occurrence the market was not positive a year later).
This data strongly suggests adding to your investment portfolio if you have any latent cash on hand.
Context
While I do not have a crystal ball and I cannot see the future (despite the rumours), I do have a tremendous amount of experience and touch, as does McIver Capital Management. Your portfolios have been built and managed specifically in anticipation of such market corrections.
McIver Capital Management and I are not paid to cheerlead the market, we work only for you and we are here to build portfolios that protect your wealth. We, and our portfolios, are doing exactly that.
Two Simultaneous Truths Collide:
1) All markets fluctuate. 2) As humans we are flawed, because we are conditioned to react to immediate stimulus.
Imagine if every home (house, condo, apartment), including yours, had a large digital sign installed outside stating the value of that home at that exact minute. You would likely be shocked at the volatility. How would you feel if the value went down over a number of weeks, or months (as has happened to real estate in most regions in B.C. and many across Canada), or sharply over a few days? Would you sell the home? Every moment you looked at the price sign you likely would feel a need to. But we all know this is likely a poor decision.
Minute by minute pricing only feeds this human need to react. A sophisticated, high quality, mathematically diversified portfolio is no different than a real estate asset, except it has a tendency to grow much faster over time and it is priced minute by minute. To be effective, it needs to be held in the same way as real estate.
Neil McIver is Sr VP and Portfolio Manager at McIver Capital Management at Canaccord Genuity Corp.
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