I wanted to provide feedback on the recent market downturn. This activity is not a bear market which is defined as 3-6 months of a market downturn, rather a market correction that is long overdue – and perfectly normal when you look at historical trends. Since March 2009, the markets have gone straight up due to unprecedented Central Bank intervention. In the last year alone, the S&P 500 increased precipitously without one pause or lack of a better term – correction – which is not normal and as a result we are now seeing a reaction. How does a stock market reach record highs yet the volatility index (VIX) remained at historical lows? It’s like boiling pasta without water – it’s not possible!
What is causing this?
Markets are starting to realize as bond yields rise (due to an improving economy), interest rates will begin to rise as we have seen, and will continue to experience going forward. The issue is Central Banks increased their balance sheets from $4 trillion to $14 trillion from 2009 (due to quantitative easing or stimulus), therefore higher interest rates means Central Banks will be paying more for the debt on their books which can be restrictive. Business will begin to see higher borrowing costs which curb profits. Therefore their stock price will become less desirable to own as investors do not want to pay for declining earnings. Higher interest rates means downward pressure on bonds (which is a component of our portfolio). Lastly, consumers will be challenged by higher mortgage and consumer loan rates. All the factors above is creating a perfect storm for the markets to decline. This decline is necessary as markets and investors alike were becoming too complacent in my view (think of BitCoin and Cannabis stocks).
Where do we go from here?
I have tracked the mandates we own and they are not dropping in lockstep with the markets. The portfolio managers have built these mandates with downside protection in mind. This market correction is not only overdue but welcome. Global economic outlook is improving but markets got ahead of themselves, with asset prices indiscriminately inflated by years of Central Bank intervention. There was an air of complacency!
Markets will go up, and markets will go down. A sensible buy-and-hold strategy makes sense even when markets suffer losses. A well-constructed portfolio is meant to be held long-term, and we need to resist making any drastic changes in response to market fluctuation. Always remember, our portfolio managers may use this opportunity to deploy their cash reserves and buy-in at these discounted prices. Clients can take advantage by also allocating new money into their portfolios in order to capitalize on this buying opportunity.