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MD Financial Management: Chief Investment Officer Market Update—Good Strategy Still Holds Amid Stock Market Volatility

What has happened?

Canadian and world stocks have fallen over the last month amid growing concern of an international economic slowdown, but they remain up over the past 12 months. MD’s portfolio strategy takes into account the likelihood of any such market corrections and remains structured to meet the long-term goals of clients.

Canadian, U.S. and world markets are down 10.1%, 3.4%, and 5.4% respectively in Canadian dollar terms since September 11, 2014. Over the year, however, the data presents a more positive picture: In Canadian dollar terms, local stocks have risen 10.4%, while U.S. and global markets have climbed 22.3% and 13.4% respectively (also in CAD terms) over the last 12 months. One significant basis for stock market growth is the potential for growth in company earnings. This remains intact as economies in the U.S. and Canada still have good growth prospects.

How is MD positioned in light of the current environment?

We continue to recommend that investors maintain an investment strategy that is aligned to their purpose and time horizon for investing. It is in this type of market environment that a sound strategic asset allocation presents the first line of defense for an investor’s portfolio. MD portfolios take into account expectations for market volatility, with a specific focus on the downside risk associated with investing over specific time horizons. At the same time, we continue to employ diversification and active management as part of a well-defined investment process to take advantage of the opportunities inherent in financial markets.


There have been numerous events worldwide that may have contributed to the recent decline in stock markets globally and in Canada. Among the key developments:

  • Expectations for economic growth globally have moderated with the International Monetary Fund (IMF) reducing its global economic growth forecast including reduced expectations for both developed and emerging economies. Despite reduced expectations, the IMF still expects real economic growth globally of 3.3% in 2014, increasing to 3.8% in 2015, with emerging economies outperforming developed market economies.
  • In recent years, policy makers, particularly in the world’s two largest economies the U.S. and Europe, have played a key role in global economic prospects and financial markets. Stock markets globally have benefitted from accommodative monetary policy since the financial crisis of 2008, but recent economic data has increased speculation around the potential timeline for the normalization of monetary policy (i.e. interest rate hikes) by the U.S. Federal Reserve. We continue to see a gradual strengthening of the U.S. economy highlighted by improvements in the labour market. The unemployment rate fell to 5.9% in September 2014 following an increase in total non-farm payrolls of 248,000. (In September 2013 the unemployment rate was 7.2%).
  • In Europe, meanwhile, the banking crisis that has hampered Eurozone economies is unresolved. The European Central Bank (ECB) has increased its efforts to fight deflation amid challenging economic prospects for the region. Recent measures by the ECB include the introduction of negative deposit rates for banks in the region and plans for an asset purchase program.
  • Commodity prices have also dropped substantially. Energy prices in particular have been hit as demand has not kept up with supply in the face of lower projections for global growth. The International Energy Agency (IEA) recently reduced its expectations for growth in global oil demand for both 2014 and 2015, while at the same time indicating global supply had reached a 13-month high. This has contributed to the underperformance of Canadian equities, as the TSX has a 26.3% allocation to the Energy sector. On the plus side, lower energy prices should help to support global economic growth in the near term.

To add perspective to the current situation, markets may be adjusting after an extended period of relatively moderate volatility. The global stock market has been resilient since the financial crisis of 2008, and has overcome a myriad of risks including global economic uncertainty, heightened geopolitical tensions, and natural disasters. Moreover, it is important to note that the recent rally in global stock markets was largely uninterrupted, with the last decline of 10% or more coming in the summer of 2011. (See chart).

Source: MSCI data via Wilshire

MD continues to monitor global economic trends, integrating viewpoints from carefully selected managers whose disciplined processes are designed to reduce risk and increase return relative to the broad market.

If you would like to learn more about MD’s disciplined investment methodology and the impact of global economic trends on your investment portfolio, I encourage you to reach out directly to your MD Advisor.

William R. Horton, Jr., CFA
Chief Investment Officer
MD Financial Management Inc.