Market volatility has been making headlines over the last few days. Investors likely want to know why this is happening and how investment portfolios may be impacted. The short answer is every market cycle experiences ups and downs. Short-term volatility should be expected by long-term investors. However, the rapid volatility over the last few days is likely a result of the new normal reality of today’s trading environment with investment algorithms, option trading and programmatic trading. The speed and all-encompassing nature of the current market environment causes prices to move faster in both directions.

 

Why are markets currently experiencing short-term volatility?

 

Greg Zdzienicki, Client Portfolio Manager, Equities, CIBC Asset Management says, “The aggressive three-day correction we just experienced is as much of an anomaly as the calm upward market trend over the past few years.” Upward and downward movements are part of the regular market cycle and long-term investors shouldn’t panic or take action during short-term periods of market volatility. Mr. Zdzienicki confirms “Markets correct approximately 5% three times a year, 10% once a year and reach bear market territory every other year or so.”

 

What is happening in global equity markets?

 

The Japanese Nikkei Index is currently down 6% Year-to-Date (YTD) and more than 25% since its peak on July 11, 2024. The question investors likely want answered is why? On July 31, 2024, the Japanese Central Bank raised the benchmark interest rate by 25 basis points (bps) causing a sell-off of the Japanese yen as it strengthened against the US dollar. Historically, investors used the low interest rate environment in Japan to borrow money to invest in other higher-returning countries such as the US. The rate cut prompted investors to sell—impacting both the Japanese and US markets.

 

In the US, this global reaction to Japan is negatively impacting equities, in particular US technology stocks. The S&P500 is currently down 8.5% from its peak on July 16, 2024, and the technology-heavy Nasdaq is down 13% from its peak on July 10, 2024. In addition to the correlation between the strength of the Japanese yen and the US dollar, recent economic data has been coming in below expectations leading the US Federal Reserve to continue holding rates and markets to price-in the possibility of an economic slowdown.

 

Does short-term market volatility present an investment opportunity?

 

Mr. Zdzienicki says “What gives us confidence when we look forward is the earnings resiliency and growth the current market is built upon. When sharp corrections like this occur, they often present buying opportunities.”

 

Aaron Young, Client Portfolio Manager, Fixed Income, CIBC Asset Management confirms “bond yields are rallying on the back of market volatility. Against market turmoil, it’s good to see bonds and other fixed income investments reclaiming their place as a useful hedge against riskier securities. These types of moves combined with attractive income shows that bonds are back to their natural utility in a portfolio. Despite a backup in corporate bond spreads, we don’t think credit risk is a screaming buy and continue with our low-risk positioning.”

 

CIBC Asset Management focuses our investment strategies on businesses that are resilient and have an ability to operate (and succeed) in any economic environment and market cycle. We also aim to invest in companies with strong balance sheets so they can withstand any market downturn.

 

“After the initial shock and disbelief of the aggressive price action, we quickly got to work looking to high grade portfolios and identify opportunities” says Mr. Zdzienicki. “We want to be ready for the ultimate bounce back whether that comes today, next week, next month or next year. We want to own the most resilient companies that are best positioned to withstand any market downturn and be best positioned to thrive when the environment improves.”

 

At CIBC Private Wealth, we take a comprehensive approach to managing, building and protecting your wealth. If you'd like to discuss this market and economic update in more detail or have questions about your investments, please get in touch with me anytime.