October 2024 Market Update
The Case for Diversification – hedging for the unknown risks in today’s uncertain world
The last four years have been some of the most challenging for investors to navigate since the great recession of 2008 to 2009. Firstly, 2020 brought us the Covid-19 global pandemic which shut down the global economy, collapsed trade and oil prices, and revealed how unprepared the worlds governments were to respond. In 2021, countries around the world provided fiscal stimulus to keep their economies afloat, creating supply/demand imbalances, and a spike in inflation and interest rates that crushed asset prices again, including stocks and bonds in 2022. Then, in 2023 came the surge in technology stocks led by the artificial intelligence boom and semi-conductor innovation. In 2024 we are finally enjoying some relative calm in the markets, with no recession, inflation falling, interest rates on the decline, and the economy in Canada and US growing modestly, all driving a stock market that is setting new highs.
In spite of all this disruption, Americans have gained over $50 billion in new wealth (JP Morgan), mostly in the hands of the top 10%, through rising real estate and stock market portfolios. In Canada, our total wealth has increased by almost $7 billion over the last 5 years (Statistics Canada). Even bonds have recovered this year after seeing double digit declines in 2022. Inflation, unemployment, wage growth and real interest rates (net of inflation), are all back to pre-Covid levels.
Investors could be excused for being somewhat complacent here, enjoying this period of relative calm and watching their investments growing to new highs. However, history tells us that the markets never go straight up forever, and there are always unexpected events which disrupt and cause market selloffs, just as we have seen so clearly over the last four years.
Below is a list of just such unexpected surprises that caused market selloffs in my 27 years as a financial advisor:
Asian financial crisis
Devaluation of the Russian Rupel
Technology stock market bubble
911 terrorist attack in New York
Failure of hedge fund Long Term Capital Management
Middle East war that disrupts oil supply
Unwinding of derivatives markets causing the great recession of 2008-2009
Greek debt crisis
US Federal Reserve policy error in 2018
Tariff /trade war between US and China
Global pandemic
Threat of Russian nuclear war
Inflation spike
Cyber attack that recently shut down US airlines
Without a doubt, there will be another surprise disruption at some point in the future that will seemingly come out of nowhere, and that one will predict, that will cause a market selloff. Such is the nature of the stock markets. We may not be able to accurately predict either the nature or timing of the next disruption, but that doesn’t mean there’s nothing you can do as an investor to protect yourself from the next inevitable downturn.
Periods of relative calm such as we are experiencing just now is an ideal time to reassess your risk tolerance. With markets trading at or near all time highs, your margin of safety is now lower than it was 4 years ago, making growth stocks particularly vulnerable to any disappointment in earnings results or operational performance. If you have been fortunate to have been significantly overweight in the US equity markets over the last four years, as our clients have been, you are vulnerable to political uncertainty or declines in the US dollar or a rotation out of US stocks as the global recovery takes hold and investors move their money to other geographies. If you are sitting on large gains in your US technology stocks, investors may look at taking some profit, and re-deploy the funds into undervalued cyclicals or interest sensitive dividend paying stocks with lower valuations and which will benefit from continuing interest rate declines over the near year. Smaller, mid cap stocks, which have under-performed relative to large cap and mega cap names for years, may represent better value now, and are often domestic focused with less risk exposure to global disruptive events such as trade wars or currency fluctuations. Gold has always been a hedge against a falling US dollar, and large cap oil and gas stocks are a natural hedge against geopolitical risk that can disrupt oil supply and cause a spike in oil prices. Bonds, while offering a modest return compared to equities, tend to stabilize portfolios during uncertain times and act as a buffer against short term volatility. Investors may consider holding cash right now as dry powder to possibly take advantage of unexpected dips in the markets.
Over the coming months we will be contacting our clients to discuss their current risk exposure and asset allocation mix, with a view to begin preparing for the next market disruption. If you haven’t looked at your own portfolio with this in mind, now’s a great time to do so.
As always, if you would like to discuss any of this material, or if you would like to review your current portfolio as we head into 2025, please do not hesitate to contact me or any member of my team and we can arrange an in-person meeting, Teams video conference call, or a telephone call to discuss your investments.
Best regards,
Gordon Forsey | Portfolio Manager, Senior Wealth Advisor | CIBC Private Wealth
1801-1969 Upper Water St., Halifax NS B3J 3R7 | Tel: 902-420-6203 | Toll Free: 1-800-565-0601
Email: gordon.forsey@cibc.ca
Website: www.cibcwg.com/gordon-forsey
Gordon Forsey Advisory Group:
Gordon Forsey P.Eng., MBA, CIM®, FCSI
Portfolio Manager, Sr. Wealth Advisor
Tel: 902-420-6203
Andreas Demone BBA
Client Associate
Tel: 902-420-9624
Terri MacPhail
Client Associate
Tel: 902-420-8263
Michael Forsey BA
Administrative Assistant
Tel: 902-420-8232
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Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc.
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