To my clients:
It was a down week for North American stock markets with the Canadian TSX falling 3.5%; the U.S. Dow Jones Index falling 4.6%; and the U.S. S&P 500 falling 5.7%.
This week’s update is tightly focused on the obvious: volatility has arrived. Let’s not sugar coat it either – this is not fun. Market corrections are never fun. And, indeed, parts of the market have reached official “correction” territory (i.e. peak to trough declines of 10% or more). For example, the tech laden Nasdaq is now down over 14% from its November peak. But even the broader, more diversified, S&P 500 is now within striking range of a 10% correction itself. Canada’s TSX is about halfway to official correction territory.
*Before moving on, I remind clients that corrections are a normal market phenomenon, and do little to change the upward trajectory of markets. The image (dated though it is) included with this week's update makes the point rather clear.
Stock prices are determined by two factors, and two factors only: 1) earnings; and 2) the price investors are willing to pay for those earnings. While earnings growth rates are expected to slow from the massive surge seen in 2021, they nonetheless are expected to grow at, or slightly above, long-term trend. So that’s the good part. But the price investors are willing to pay for those “at trend” earnings is less than it recently was because the US Federal Reserve and other Central Banks (including the Bank of Canada) are expected to imminently raise interest rates. The price investors are willing to pay for earnings is widely known as the “market multiple” – and it is lessening. That’s the not-so-good part.
But there is always something to worry about when investing in the stock market – be it elections; wars; pandemics; inflation; deflation; interest rates, natural catastrophe etc. etc. As I have long asserted, absent the coincident onset of recession (or the viable prospect of imminent recession), the uncomfortable volatility inspired by these sporadically recurrent fears is best ignored – it’s simply impossible to time consistently. In fact, the better course of action is to ADD equity exposure as long as recession indeed is not imminent. In other words, buy assets when they are on sale.
Therefore, as I wrote last week, and reiterated in my quarterly letter to discretionary clients this week, since recession is NOT imminent, I am contemplating a small increase to equity exposure in client portfolios at the beginning of next week if further weakness develops. I reiterate, this will be a small increase. Excepting the most aggressively positioned clients, most portfolios are currently positioned about 10% below the upper bound of permitted equity (i.e. stock) as specified in each client’s unique Investment Policy Statement. Should I indeed add equity exposure, I may move positioning up to within 5% of that upper bound.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
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Any recommendations herein are for the exclusive use of clients of RBC Dominion Securities and Investment Advisor Nick Scholte. Any other direct or indirect recipient of this email should consult with his/her own licensed investment advisor prior to implementing any investment action he/she may be contemplating.