This summer I have had the opportunity to meet many of you, learn about you and your families, and discuss the markets of the past year. The end of the year is just around the corner, and we are looking forward to meeting with many more of our clients as we discuss their portfolios and ensure they are reaching their goals. To those that have not met me yet, I am Calvin Tenenhouse, a graduate of Ivey business school at Western University, and the first graduate of CIBC's Rotational Private Wealth Management Program. I joined the Greenwood White Group this past spring.

 

The markets have been volatile in 2022, with the S&P500 experiencing intraday swings of 1% or more on over 87% of trading days. The last time market volatility was this high was during the 2008 financial crisis. When speaking with clients, friends and others in the industry I have noticed a recurring two-part question that I would like to take the opportunity to address; When is the next market rally, and should I hold cash until the time is right?

 

When is the next market rally?

Typically, market corrections work their way through once the cause of the drawdown has been addressed. In this case the driving force is inflation. Since 1992, North America has experienced modest inflation of 0-4% annually (Source: World Bank). After decades of inflation averaging about 2%, the Consumer Price Index (CPI) has surged 4x in over a year to its highest level in over 40 years. The only tool at the disposal of central bankers to combat rising inflation is increasing interest rates, which are being utilized to cool off the economy. The central banks raising rates has set off a domino effect where the weaker economic environment, and higher cost of borrowing, has compressed valuations and made it increasingly difficult for companies to generate profit. If you didn’t have a chance to read our previous blog post on inflation I invite you to read our team's piece titled Inflation & the Goldilocks phenomenon: Not too hot, not too cold, but just right.

 

The hard truth is we can't know when the next market cycle will begin. No one can. What we do know is that for companies to raise sales targets and valuations to grow one important condition must be present in the economy and that is signs of decreasing inflation back to the long-term average (measured using the Consumer Price Index).

 

So, should I sit on cash until the time is right?

The short answer is no, but allow me to provide some broader context. The stock market is known as a leading indicator. In other words, the markets are looking ahead and trying to forecast the future. Consequently, current stock prices reflect the future earnings potential and profitability of corporations. Stocks recover well before anyone feels comfortable wading into the market and unfortunately no one rings a bell when we are at the bottom!

 

Ideally, we would buy companies at their lowest valuations and sell them at their highest; that's not rocket science. The problem is that the stock price on any given day is not always a perfect reflection of the company's long-term value due to the current macroeconomic conditions. But the main reason market timing fails is that many of the best individual days in the market occur during recessions, and some of the worst days occur during bull markets. Neither we nor anyone else can predict when the best or worst days will come. When we try to predict when these extreme market days are going to occur, we become gamblers instead of investors. To make it even more difficult, the best and worst days in the market often happen very close together! For example, three out of the best 30, and five of the worst 30 S&P500 trading days occurred during the eight day trading period between March 9 and March 18, 2020 (Source: wellsfargo). I invite you to take a look at the graphic below, which shows how missing the 10 best trading days in the market over the last 36 years cuts your returns in half. Those who remained fully invested are able to take advantage of unpredictable but substantial market increases, when they occur.

 

 

So, what should I do instead?

There are two investing techniques that everyone can use to improve returns while simultaneously lowering risk regardless of market conditions. They are Dollar-Cost Averaging and Rebalancing.

 

1. Dollar-cost averaging, or what you have probably heard us refer to on our calls as “averaging in”, is the practice of systematically investing equal amounts at regular intervals. By buying consistently with respect to amount and timing, you will end up acquiring more shares when prices are low, and fewer when prices are high. By not attempting to “time” the market at all, you’ve essentially timed it perfectly. As a result, you end up with a lower average cost per share as very few shares were bought at high prices. And below-average costs tend to result in above-average returns.

2. Rebalancing involves buying asset classes that have fallen below a portfolio’s long-term allocations and selling those that are higher than long-term allocations. In plain English, you sell the outperformers and use those funds to buy more of the underperformers (assuming your thesis for buying those companies hasn’t changed). As a result, you not only take profits from your winners but also reset the weightings of each asset class in your portfolio to their original targets, regardless of market fluctuations. Simple yet effective, and we’ve been doing it regularly in both our Growth and Income oriented portfolios that we manage for you.

 

Final Thoughts

Since the S&P 500 index was introduced in 1957, the average length of a bear market has been 289 days (just over 9 months). Once the correction is over, and the turnaround begins, the average bull market runs for 991 days, almost 3 years (Source: Forbes). A great deal for investors - if you’re prepared to stick it out. History teaches us time and time again that economies continue to grow and emerge stronger after times of uncertainty, such as the one we are experiencing right now. So, if you feel like the markets are collapsing underneath your feet, do not worry. Take a look at the paragraph above and then give us a call! We are always happy to chat.