Market Fragility vs. The Long View

 

As I field questions about market timing regarding recent market volatility, I try to remind investors market timing can seldom be achieved successfully, even though it often appear apparent after the fact.

 

We have enjoyed a time period of low volatility. The Federal Reserve in particular has contributed to this by providing support and stabilization of the market since the Great Financial Crisis.

 

However, this should not be taken for granted. There is a limit to the continued effectiveness of monetary and fiscal policies of the Fed and the U.S. government. It is right to remind investors, as many industries are facing the inflection point of disruption, that it is reasonable to expect higher levels of volatility in the markets to accompany these uncertainties.

 

Some key takeaways are:

• The consensus outlook by economists is one of continued recovery and growth. Projection of real GDP for North America is close to 4% and projection for corporate earnings growth is on average 10%
• Cyclically, we see the economy move from early cycle to mid cycle, and we do not yet see signs of recession for 2022. Historically speaking, based on market data from 1927-2019, when the real GDP growth is greater than 4%, markets have performed with an average growth of 8%
• As the economy returns to its pre-pandemic growth trajectory, there will be an increasing demand for the Federal Reserve to raise interest rates and modulate the economy. This can trigger a repricing of the valuation multiples on the markets. This can have the biggest impact on growth companies where the majority of the value is expected to materialize over a longer duration

Here are some great reminders on market timing:

 

Even though market returns are positive 68% of the time (S&P500 annual returns from 1927 -2020), a market pullback of 15% or more is common to historical observance.

Source: Refinitiv DataStream, Fidelity Investments

 

Investors that try to time the markets by attempting to sell at highs and buy in at lows often detract from the portfolio performance overall. It is the most detrimental when investors panic and sell at market lows.

Source: Refinitiv DataStream, Fidelity Investments

 

Lastly, as we enter the new year, it is a great time to review and revisit your overall risk appetite and tolerance for market volatility, so we can arrive at the most optimal customized outcome. It may mean to give up on some upside performances to achieve downside protection. However, as long as we have an overarching objective to align return with risk tolerances, we can achieve the desired long term outcome.

 

 

Rita Li works with individuals and business owners and healthcare professionals to provide tailored investment advice, risk management and financial planning. Her team comprises of professionals with in-depth taxation, insurance and legal expertise, together, they deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and holds her MBA from Richard Ivey School of Business.