Milan Cacic
August 09, 2024
MARKET VOLATILITY IS NORMAL
Volatility and market corrections test investors’ resolve. Behavioural finance teaches us that we are prone to loss aversion. This means that when markets go up, we feel that it is expected, and we get comfortable. However, when markets go down, we have a sense that the bottom is going to fall out, and our first instinct is to cash out. This past week was the first test we've experienced in 2024. When market volatility increases like it has this week, people start to question whether or not they should be in the market. We think this is a good time to take a look at the underlying fundamentals:
- With 80% of the companies reporting, second-quarter sales growth was 5.2% and earnings growth was 12.1%.
- As per the chart below, earnings growth is starting to accelerate again.
- Sectors leading the way in earnings growth were the communication services (+21%), information technology (+17%), and financials (+15%).
- The market is predicting a 100% chance of a 25bps rate cut in September and a 60% chance of a 50bps rate cut. Canada will continue to cut rates for the foreseeable future.
- The breadth of earnings growth is approximately 70% across the S&P 500 companies. Defensive stocks like utilities, real estate, and consumer staples, are starting to perform well.
When we sum up all the points above, it's hard not to be constructive on the market. We believe the biggest risk to the market at present is the Federal Reserve not cutting interest rates quickly enough. During times like this, it's good to remind ourselves that we have a plan and a properly diversified portfolio. In the end, the volatility will slow down and companies that grow earnings will do the hard work of compounding portfolio returns.
I have also included a piece from our CIBC economics team entitled “When the facts change”.
As always, if you have any questions, please feel free to give us a call at any time.
Have a great weekend.
Milan