Volatility in Early 2018
Following another rough day in the markets I sent the following information out to clients today. Volatility has come back with a vengeance with the Dow Jones Industrial Average and S&P 500 each falling more than 4% Monday after struggling last week. I truly believe that this is a correction in the late stages of a bull market and not the start of a long term decline. We may see further downturns. U.S. companies are reporting good earnings and many are increasing their outlook over the next year. Inflation worries may be of concern at the U.S. 10 year bond rises.
While the market’s swoon is jarring I think investors should maintain equity positions as healthy economic and earnings growth prospects provide a solid outlook for equities.
A 1,175 point drop is not what it used to be in percentage terms given the Dow is now well above 20,000. Back when the Dow was at 10,000 that same point decline would have represented a 12% plunge. That being said, a selloff of this magnitude is rare. The last 4% single-session decline in the S&P 500 was in August 2011 when Washington dawdled about raising the federal debt ceiling and put the U.S. credit rating at risk.
Following the selloff, the S&P/TSX Composite is down 6.6% from the 2018 high close. The domestic market has fared better relative to the 7.8% decline of the S&P 500. Through the recent market turbulence, recourse sectors and those that have historically negatively correlated with interest rates have underperformed in Canada while the remaining sectors have fared better than their U.S. counterparts.
Most important for equity investors, the market’s three-legged stool remains sturdy:
- The economy is strong
- U.S. corporate profit trends remain solid
- Market valuations have improved
Patience is a Virtue
Episodes like this tend to take time to play out. Next week marks my 17 years with RBC Dominion Securities and that tenure has taught me “not to panic” and to look at true fundamentals. Market corrections never give any advance warning; normal life continues on with appointments and events that have already been scheduled. During this time I continue to review portfolios and often look for opportunities during this downturn to add to company names that get “hammered” more than they should. Investors have time to be patient and make portfolio decisions thoughtfully and in-line with long-term goals.