Like most creatures on the planet, we are wired to over-react to potential dangers. Like when one of my kids encounters a medical condition and I Google the symptoms, revealing a myriad of possible and mostly terrifying causes. Naturally, I immediately fixate on the worst possible, but least probable diagnosis. Of course, to my relief, after proper diagnosis by our family physician, it’s just something common and easily treatable.
It’s no surprise that investors often have the same reaction to markets when they drop or exhibit increased volatility. I’ve been in the financial services industry for over 30 years and have spent most of that time managing investments and advising clients. My advice has always been don’t panic—if you have clearly defined financial goals and an investment strategy to get you there—stick to your plan. The market is cyclical and the ups always offset the downs.
If you are feeling anxious about market conditions, reach out to your MD Advisor. Revisit your financial goals and your investment strategy that you put in place together. You’ll walk away reassured that you are still on pace to successfully reach your goals despite these recent market movements—and isn’t achieving your goals the point of investing in the first place?
It’s perfectly healthy for markets to correct
Equity markets around the world continued to sell off this week. From the peak, global equity markets have dropped approximately 8% as of last week. Our research suggests that this correction is not pointing to an imminent bear market and that markets should eventually rebound. Continued global economic strength and the benign response from credit markets suggest that there is little risk of a recession. With that being said, this heightened volatility in equity markets will likely persist. For what we suspect is disturbing equity markets, see my previous post Defense Wins Championships below.
MD Funds, Pools and Portfolios are built with volatility in mind
Market volatility is an inevitable part of investing so we’ve built our funds, pools and portfolios with volatility in mind.
From a portfolio perspective, our long-term strategic asset allocation strategies are designed to meet your specific financial goals over the appropriate time period, and are built to withstand the impact of short-term market volatility. The strategic asset mix of your portfolio will determine your long-term success even as you ride the ups and downs of the market.
As a secondary measure to enhance your long-term success, we purposely build defensive characteristics into our investment strategies in order to better withstand market volatility. In general, MD Funds and Pools continued to perform well relative to the markets, lessening the impact of the correction.
We remain confident that our strategies built on a fundamental, bottom-up, defensive style of investing will perform well in a more modest return environment for equities and provide downside protection during declines because we invest in reasonably priced stocks that often have meaningful dividend support.
Volatility is an opportunity in disguise
At this time, we’ve done a little buying—taking advantage of some attractive pricing opportunities. We will continue to deploy additional capital when specific stock opportunities arise or if the aggregate risk-reward of the market improves even further.
For example, we act on long-term investment trends, not short-term market noise. If a biotechnology company’s stock price dropped because of the correction, it does not necessarily mean that the company is a bad investment or that they will stop developing innovative therapies to improve patient outcomes. If nothing has changed fundamentally within the company, we will remain invested and may even invest more.
We will continue to monitor global conditions, with particular attention to credit markets and our proprietary bear market indicators. As market conditions evolve, we will adjust our investment strategy accordingly, so you don’t need to.
Ultimately what is vital in achieving your financial success is knowing your financial goals and having an investment strategy designed to get you there. It’s normal to be concerned in times of volatility—so contact a professional, your MD Advisor, to talk it over.
Defense Wins Championships
Posted Feb 5, 2018, 03:55 PM | BY CRAIG MADDOCK
This past Saturday at my Kung Fu class, my Master reminded me about always being ready. To my Master’s point, despite practice and planning, you may still get hit in the heat of combat. As I trained my concentration and learned about how to receive a hit, I was reminded that getting hit is inevitable and that how you prepare and respond to it is what’s most important.
Defense wins championships may be a sports cliché, but over the last week, as markets took a hit, most MD Funds and Pools performed relatively better due to the carefully constructed, built-in downside protection of our investment mandates. Protecting your investments as markets correct significantly contributes towards the ultimate goal of achieving your financial goals.
Equity markets fell approximately 3% last week
During the week of January 26th to February 2nd, major market indices retreated from recent highs representing the largest percentage drop since the Brexit fallout in 2016:
- S&P/TSX Composite Index: -3.85%
- S&P 500 Index: -3.31%
- MSCI EAFE Index: -2.23%
The strength of the U.S. economy and the solid jobs data pushed interest rate and inflation expectations higher, which negatively impacted equity markets. Overall, higher bond yields are a positive, so we see last week’s drop as a healthy correction.
MD Funds and Pools outperformed last week
The drop in equity markets last week may have felt like a gut-punch to investors, especially for those that didn’t see it coming or were ill prepared.
Fortunately for our clients, we build downside protection into our investment strategies because no one can consistently predict when a drop will happen—what we do know with certainty is a drop will eventually happen. As expected, most MD Funds and Pools performed better than the market last week, avoiding the full force of the decline.
Some of the notable drivers of our outperformance last week were:
- Holdings in OpenText, a Canadian software company was up over 7% and U.S. FAANGs (Facebook, Amazon, Apple, Netflix and Google) held up reasonably well, outperforming the S&P 500 by 1%
- Avoiding Canopy Growth Corp., a marijuana stock which fell 31%
- Tactical underweights to energy and material stocks which pulled back approximately 6%
We continue to favour equities over fixed income
While we expect more volatility in the weeks and months to come, we do not believe that this is the end of the current bull market run.
The last significant drop in the S&P 500 happened two years ago. Since then, we’ve seen synchronized global growth, improvements to corporate earnings and a continued decline in unemployment. We’ve also seen strong stock price appreciation along with rising valuations, resulting in January being the best month on record for U.S. equity purchases. It appears U.S. investors have never been more optimistic.
As outlined in our recent investment views and positioning, we share in this optimism. Despite last week’s decline, we believe economic expansion will continue to drive equities and are maintaining an overweight equity position.
With that being said, markets are not always rational, but rest assured we will continue to monitor our investment strategy relative to global economic conditions. Much like how I’m set to take on my sparring partner, we remain prepared and ready to respond to whatever comes our way.