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Milan Cacic

August 16, 2024

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RIDING THE WAVES

The past month could be used as a Market Trading 101 class on market volatility and how not to react to sudden market drops. This week we saw the Volatility Index have its largest increase in one day, while the markets dropped 6% and then promptly gained almost all of it back.

 

As I said in last week's note, people tend to extrapolate short-term drops in a straight line over a long period, making them think that the bottom is going to fall out of the market. This is rarely the case. It's important for investors to know that these large swings up and down are unfortunately normal. As you can see from the chart below, most up years tend to have a market drawdown of more than 10% sometime during the year. This is the price we pay for outsized returns.

 

I should also point out that, historically speaking, bull markets have lasted an average of four years with a median overall return of 110%. This current bull market started in October 2022, which is less than two years ago, and has returned 40% so far. If the bull market were to end today, it would be the shortest bull market in history!

 

During times like these, it's important to:

  • Revisit your long-term plan.
  • Rebalance your portfolio to align with your long-term plan.
  • Use dips in the market to put cash to work, not the other way around.

chart showing max annual drawdown and corresponding calendar year returns for the S&P500 from 1994 to 2024

Source: Seven considerations to make the most of market volatility, JPMorgan.com; Aug 9, 2024

 

I have also included a piece from our CIBC economics team entitled “What's up with Canadian wage inflation?”.

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan

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