Investment Focus | Issue 13 | An Overdue Correction

It has been a volatile start to the year.

We’ve had 30-year highs in inflation, interest rate increases, Covid, the Ukraine/Russia conflict, and China lockdowns.  There’s even talk of a European recession next year and potential American recession in late 2023.  All of this has caused negative returns in every asset class, especially in the tech space and smaller companies.  The only sector to really weather the storm this year as been oil, which is why the Canadian stock market is close to neutral this year.

Fortunately, news events and volatility have little impact on long-term returns. On any chart, markets trend up and to the right. That still doesn’t make short term corrections very palatable though! It’s especially tough when the fixed income portion of your portfolio is down as well. So far this year, the Canadian bond market has dropped 11% and has had its worst quarter in decades. Investors aren’t accustomed to this. Bonds have long been the stable part of portfolios, cushioning the blow when stock markets fall. This relationship hasn’t held up this year.

All of this leads to the question of what to do.

The quick answer is nothing at the moment. Typically, during a time of elevated volatility, we would be re-balancing portfolios (selling investments with gains and buying investments with losses), but right now everything is in a loss. Although the Canadian index shows a much lower loss, unless you were overweight in oil, the Canadian returns are very similar to the rest of the indexes. There is good news in Canada as well though. Our GDP number released last week up 4.5% beating expectations and our labour numbers show Canadians are back to work at pre-Covid levels (historically low unemployment).

Regarding the bond market, thankfully the worst is probably behind us. The rate hikes have been priced in and the expectation is that the rest of the year will be a bull market in bonds. When the Federal Reserve removes liquidity from the markets (Quantitative Easing), market participants shift from “risk-on” positioning to “risk-off”. As well, as bonds are maturing, new bonds are purchased at higher interest rates improving the yield of the fixed income portfolio.

We don’t tactically position portfolios in anticipation of short-term trends as that’s a fool’s errand (as study after study has confirmed). Bottom line, the recommendation is to sit tight. It can be hard during times like this to do nothing, but history has shown us that when one tries to meddle when things are down (market timing, tactical switches to other asset classes, etc), it usually results in worse losses.

Also, although we had a market correction in 2020, the end of the that year left most investors with a gain. We haven’t had a full correction since 2008, so we were due for this for a very long time. It doesn’t make it less painful, and there’s no promise that the year won’t end up in the positive, but we know that when we look historically at market returns over 3-5 year periods, your chance at a loss is almost zero. For our retired clients, our cash wedge strategy is protecting your portfolio against losses as you withdraw income. We continue to structure the rest of your portfolio investments for long term growth and income. We will make sure to keep you updated if trends change this year or we need to take action in your portfolio.