Our entire lives are full of ups and down, peaks and valleys, trials and tribulations, and any other number of clichés I've omitted.
There's simply no reason financial markets should be any different. Volatility has picked up since the end of August, causing many of the bears to come out of hibernation and proclaim an end to the bull market that's been underway since March 2009.
We often quote our friends at Ned Davis Research in stating that it remains a bull market until proven otherwise, and the evidence still argues for a continuation of that bull market. But rather than pontificate, let's look at the facts and try to tackle some obvious questions.
First, why has volatility picked up as of late? Fears have increased over a slowdown in other parts of the world, mainly in emerging markets like China. The bursting of the Chinese stock market bubble certainly has not helped investor sentiment globally, even though the market there has little connection to the real economy.
Another factor has been uncertainty surrounding monetary policy courtesy of the US central bank - the Federal Reserve or the Fed. It has kept interest rates at rock bottom levels since 2008 to help stimulate the economy by making money less costly to borrow. The Fed hasn't raised rates in almost a decade, and recently decided at the September policy meeting to keep rates unchanged at zero.
The market was pricing in a decent probability of a rate hike, so inaction on the part of the Fed has ironically increased uncertainty. The lack of confidence on the part of the Fed that the economy was strong enough for higher rates may also have spilled over into the market, further adding to volatility.
So what should investors do? Those who have read our past articles know we are big proponents of cash in times of uncertainty. The result is that it will even out some of the ebbs and flows of the market, and gives your portfolio buying power when things settle down. This is part of an active management strategy that has served many investors so well in the past - avoid big declines and have a plan to move to the sidelines when markets get tough. Finally, market sell offs are not rare (we see a 10 per cent correction once a year on average), but "V" shaped rebounds after significant drawdowns are. Typically, the recovery is more of a process and it continues to play out nicely. The VIX, a gauge of investor fear, has come down from more than 50 at the end of August to less than 25 at the time of this writing. The market also continues to grind higher and has picked up off the lows.
These are all encouraging signs. So it's important for investors, or their financial advisors, to create a list of the stocks they will want to purchase once a little stability comes back into the markets. It's important not to become emotional about the markets moving higher and lower during the cycle and to have a disciplined strategy when investing in all market conditions.
Lori Pinkowski is a senior portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Monday morning on CKNW at 8:40 a.m.
