While most of us were able to enjoy the beautiful weather over the long weekend, the markets didn’t seem to get the same cue. After a weaker than expected jobs report last Thursday, we saw a bit of an unwind in what was a rather heated market during the first half of the year. The Canadian market seemed to follow suit to some degree, as they often take the lead of the US markets over shorter periods.

Here are a few key points that I thought would be helpful to keep in mind through one of our more volatile periods in almost two years. I know some of you may have seen this before, but a reminder is helpful even for our more experienced clients. As Morgan Housel, the author of one of my favourite books, the Psychology of Money, says “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up”

Market volatility is normal and healthy

The odds of a 5% correction in a given year are 94% and the average intra-year decline from the peak is actually 14.2%. Returns were still positive 33 of 44 years. As we’ve often said, volatility is the price of admission for higher returns. You have to be there for both the ups and the downs, as even the best minds in the world don’t run an all-in or out style of investing. Our success has been in buying high quality through good and bad times, but these volatile periods pass and the proof is in the longer term returns of your accounts.

Indexes and the growth of them in the past 5 years cause the moves to be more exaggerated.

When someone sells an index, the index providers responsibility is to be liquid so they have to liquidate the companies at whatever the cost. In a falling market, it really exaggerates the moves on both sides, so when there is selling pressure there is often a snowball effect, which is what we saw Monday. Another point on this is that none of our accounts are single index driven. When you see a fall of 5% on the S&P, it is very unlikely to equate to a 5% fall in your account. We hold individual securities, various indices, alternatives, and fixed income, which are all diversification tools to weather market pull backs. It doesn’t mean you won’t be down, but the headlines might not equate to the same panic in your individual portfolios. Reach out to our investment team if you want to discuss that point further.

Institutions were net buyers

According to JP Morgan on Monday, institutions were buyers to the tune of 14 billion vs 6.8 billion of net sales. This is the money we want to be cognizant of; not the retail buyers/sellers. Institutional investment behaviour typically follows a more proactive approach vs. a reactive one.

The COVID excess of job creation had to unwind at some point.

It’s really what the federal reserve wanted to see to lower rates. The line is fine as lower unemployment can sometimes signal a recession, but whether the Federal Reserve was late on cutting rates can be debated and they have lots of room for cuts throughout the rest of the year. These cuts often drive the market higher, so we need to remain invested through that period.

Earnings

Earnings are often the underlying driver of the market, and throughout the past quarter the average earnings growth in the US was 12%. This tells us that companies are still showing relative strength.

Bonds

Bonds are once again doing their job, which they didn’t do in 2022, and we’re seeing some downside protection and uptick in the fixed income portion of our portfolios. This is why you have them, not for the higher returns, but to lower the volatility. This can be quickly forgotten when the market is moving higher, but is praised when the market is down.

Overall, our thought is that the recent sell-off was a bit overdone and doesn’t change our long term thesis on the market. We think we’re still in a bull market, although with some rotation now to some of the companies that haven’t participated to the top end of the S&P 500. In certain cases, adding new money may be warranted depending on the circumstance and the length of time you can invest. The market turn wasn’t severe enough to warrant an all-out buy recommendation, and as of time of writing, we’ve already seen a bit of rebound on the major US indices.

Our thought for now is to continue with your current asset mix and contact us if you have any questions or would like to discuss your individual portfolio strategy. We’ve gotten through many bouts of volatility and given current data, we don’t believe that this time it will be different.