There has been some volatility on the TSX this year including a small pullback over the past month and a half.
This essentially means that the markets have given back some of the gains we had in the first quarter - all of which is quite normal and healthy in a secular bull market. If you are committed to being invested in stocks, you need to be prepared to accept that your investment portfolio will not increase every month. If it did then I would be retired and many of you would be millionaires!
Over the past three-and-a-half years the stock market has had a number of pullbacks, averaging two per year. In 2014, we had one early in the year and then again in the fall. These moves do not mean that the bull market is over or that it's a shift in the overall momentum of the markets; they are simply normal pauses and are needed to maintain a long bull market.
It's been a slow start with the TSX and SP 500 both up a little over two per cent so far this year, but we expect the second half of the year to be stronger. The month of April was particularly weak for two reasons. Some investors were selling to take profits on stocks that had spiked in the first three months of the year, but most of the correction that investors experienced was due to the currency. The Canadian dollar rallied eight per cent against the U.S. dollar which meant that investors who are heavily weighted in American stocks would have seen an extra drop in their portfolios just because the dollar spiked up. We've already seen the Canadian dollar start to fall back down and I feel the bump we saw was a short-term fluctuation. We expect the U.S. dollar to trend higher as we get closer to the interest-rate increase that is anticipated to come within the next year.
I recommend investors who are concerned about volatility stop tracking their performance so closely. If you're looking at it on a daily or weekly basis, that's too much! Price volatility is normal. Looking at your portfolio that often can hinder performance and cause unnecessary anxiety. Investors need to have confidence in their portfolio manager's decision-making capabilities in any market condition.
Having an exit strategy is important for your portfolio. However, if investors sold their stocks every time the markets had a three-to five-per-cent pullback, they would be sitting on too much cash for much too long and would likely miss out on returns while also triggering taxable gains. We have a stop-loss strategy in place for our client portfolios which ensures that we protect our clients' capital as well as lock in profits should markets have a more significant downturn. In a bull market, stocks as a whole will continue to increase in value; however, there are situations that arise when certain sectors like gold, mining and energy become out of favour. This is where stop losses protect portfolios from holding the wrong stocks after a bubble has burst.
Volatility in the form of smaller pullbacks and rallies comes with owning stocks and if this makes investors uncomfortable then they should revisit what investments they hold and what returns they should expect to have. Overall, we remain bullish on the market and will continue to do so until we are given evidence to prove otherwise.
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.
