We wanted to take a moment to share a special market and economic summary by our in-house CFA Charterholders, Matthew Jenkinson and Cy Korun, addressing the current market volatility and economic uncertainty.
Overall, the fight against inflation has weighed on stock markets globally with the NASDAQ, S&P 500, MSCI EAFE and TSX down 31.4%, 21.5%, 20.9% and 7.5% respectively. The US and international markets are well into correction territory, defined as a decline from their peak by 10% or more, with the TSX standing out as significantly better and not yet in correction territory.
The US inflation figures released on June 10th, 2022 surprised on the high side and have added volatility to an already negatively pressured market. Over the last five days of trading the S&P/TSX Composite Price Index (TSX) posted a loss of 5.9%. In the US, the S&P 500 fell 9.3%. Europe, with war in the region and yet to begin raising interest rates, was hit even harder with the MSCI EAFE Index being down 11.2%.
We’ve highlighted a few key points of consideration to put the recent market decline into perspective and outlined our recommended course of action going forward.
- Market corrections are a normal occurrence. Since 1937, US markets have experienced 52 corrections which roughly equates to one every 20 months. It has been 27 months since the previous correction. A market correction can help long-term investment performance as portfolio managers are often able to identify an increased number of attractive buying opportunities after a fall in stock prices.
- A significant part of the negative returns over the past five trading days was to erase the gains that had occurred when market consensus started to predict inflation was coming under control in mid-May. The TSX had posted a 4.8% gain from its May low, the S&P 500 gained 8.9% and the MSCI EAFE gained 5.4% from their mid-May lows.
- Strategically, 18-months ago we favored an overweight Canadian equity position for its value and commodity-based characteristics which have been the best performing asset class. All our Canadian equity funds are positive for the year at 6.9%, 3.8% and 2.9% YTD and these funds make up ~50% of each portfolio’s equity weighting. Example: if your risk profile is 50% equity then 50% of 50% which is 25%, is invested in these funds.
- Our selected equity portfolio managers demonstrated positioning which anticipated increased market volatility with rising inflation and corresponding interest rates. There continues to be an overweighting in defensive sectors such as healthcare and utilities which are less affected by market corrections and an underweighting in financial services which historically have been more heavily impacted by recessionary conditions.
- As interest rates rise bonds begin to look more attractive as their yield-to-maturity rises. Furthermore, coupons and principle which is paid-up is reinvested at more attractive yields which is long-term beneficial. Furthermore, considering rising inflation and interest rates which are inhibiting a full COVID economic recovery we continue to favor high quality fixed income to ensure we realize the higher yield-to-maturity by minimizing the risk of default.
We continue to recommend maintaining your current asset mix which incorporates a strategic asset allocation adjusted for our capital market expectations. Value and Commodity-based equity investments remain the main driver for longer-term growth and inflation protection within your portfolio. Volatility is the normal path towards that growth. Tactical shifts out of equities as a reactionary response to market losses can negatively impact the long-term performance of your portfolio.