2017 was a very unusual year in world equity markets. The U.S markets had another very good year and the Canadian market underperformed (not unusual). Speculation returned with the enigma of Crypto currencies and the green rush of Cannabis stocks (somewhat unusual). The really abnormal and important aspect of 2017 was the complete absence of equity market volatility (extremely unusual).
The major goal of this blog is to communicate investment strategy to both current clients and prospective clients; It is not to forecast markets. This article is meant to provide a reference for whenever volatility should arrive, to explain that resets are a normal and much needed part of the market, and to embrace the opportunities that may be presented.
During one of the largest bull markets in history 1994-2000, the S&P 500 had some very large corrections especially in the later years. Between July-October 1998, the S&P had a 22.40% correction during the collapse of Long Term Capital Management (LTCM). This was a difficult few months but the market turned around and rallied another 67.90% into the high of early 2000 (see chart below, Source Thomson One). One might expect this type of reset at some point over the next 12-18 months. It is what tends to happen in late bull markets or in a mid-cycle reset. The belief that the market will correct by only 5.00% when it finally does appears misguided.
So far in 2018 there has been some heavy rotation out of interest sensitive equities (utilities, pipelines, REITs, telecom) and into the equity of companies that can pass on price inflation if it should spike or rise over a longer period of time. The first articles we wrote on this Blog foreshadowed this rotation in a higher interest rate environment. (see The Bond Market: These Times (Maybe) A-Changin' and Higher Interest Rates: The Good, the Bad, and the Ugly).
This has been a very busy start to 2018 and we have recommended some profit taking and rebalancing. The yields on 5-year GICs are now pushing 3.00% for the first time in years challenging the dividend yield of the equity market. The rebalancing has been done to both reset the risk allocation and also to prepare for the potential for greater market volatility. As written previously, the goal is not to be “all in” or “all out” of the equity markets but to keep a prudent balance. One should buy weakness and sell strength around the margins to add value and to maintain a prudent balance.
This market is getting very interesting and dynamic and we look forward to the rest of 2018. There are attractive investment opportunities but there are also opportunities to sell. In watching and listening to many market participants one wonders if planting seeds in Autumn is a good idea; some trees have indeed “grown to the sky” and need to be pruned. The TSX continues to struggle and if one reviews the largest holdings in the index, it is likely that this will continue. Holders of Canadian index funds and ETFs may become increasingly frustrated.
This publication is solely the work of Jon Batchelor for the private information of his clients. Although the author is a Manulife Securities Advisor, he is not a financial analyst at Manulife Securities Incorporated and Manulife Securities Insurance Inc. This is not an official publication of Manulife Securities. The views, opinions and recommendations are those of the author alone and they may not necessarily be those of Manulife Securities. This publication is not an offer to sell or a solicitation of an offer to buy any securities. This publication is not meant to provide legal, accounting or account advice. As each situation is different, you should seek advice based on your specific circumstances. Please call to arrange for an appointment. The information contained herein was obtained from sources believed to be reliable; however, no representation or warranty, express or implied, is made by the writer, Manulife Securities or any other person as to its accuracy, completeness or correctness.