First things first: we’re all in this together. If there is comfort and safety in numbers, across the board, pretty much everyone’s portfolio has taken a hit as stocks have wiped out their gains for the year. But things aren’t as bad as you might think.
Yes, growth seems to be slowing and we appear to be in the late innings of the longest bull market in modern history--and that’s OK. There are reasons to be cautiously optimistic:
- We are not in a recession nor do I think we’re entering a recession. We may see lower than expected GDP for Canada and the U.S. but that’s still growth. The market seems to be pricing in economic chaos and the worst case scenario down the road, but I don’t believe we are anywhere near that because the fundamentals are still sound. The biggest immediate signal that all is well: The U.S. Federal Reserve is expected to raise interest rates. It wouldn’t do this if the economy was headed into recession.
- Geopolitical unrest and 3 am tweets from the U.S. president are behind much of the market volatility. These are not economic indicators. Corporations are still reporting solid earnings. Retailers, in particular, are reporting strong numbers. The data shows that people have a lot of money and they’re spending it. The housing market in Canada may have slowed but it’s not falling off a cliff.
- We are in an environment where anything can happen, including a market bounce-back. Donald Trump can issue a tweet announcing a trade deal with China and the markets can open 300 points higher just like that.
- Statistics show that some of the worst markets are followed by some of the best. It makes sense because over time everything reverts back to the mean. We know the S&P 500 averages an 8% rate of return. A couple of years ago, it made 20%. This year it will make zero. The average is now down to 10%. When you’re over-sold, you know a bounce is coming, when you’re over-bought, you know a sell-off is coming. That’s just the way stock markets work.
Personally, I am optimistic because once we filter out the noise, we are going to go back to focusing on the fundamentals of companies and the fundamentals and their prospects for growth are good. Once the market starts pricing good back into the equation, stock prices will go higher. This market has become extremely cheap. We are over-sold and I think the things that are pulling the market down are short-term in nature and will be resolved, hopefully, soon.
My best advice to investors: Stay the course and adjust your portfolio to reflect the current environment. For example, it’s understandable to want to be defensive when markets drop, so you may want to buy more conservative, less volatile stocks such as utilities or telecoms that have proven to weather market volatility well.
I do not recommend leaving the market and then trying to find the right time to buy back in. That is a bad strategy because it’s impossible to time the market. Getting out is easy. Getting back in at a beneficial time is a lot harder. Instead, stay invested and be there for when the market rises--because we know it will.
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