Investing through the market cycles
Many academic theories focus on the path to maximizing investment returns between the present and the future, assuming you will stick to one investment strategy throughout this time. In practice though, most market participants are influenced by emotions such as euphoria during bull markets and despondency during bear markets. There are few financial variables more correlated to performance than a commitment to a strategy during the lean years – both in terms of total return and the odds of capturing it over time.
Consider this, the historical odds of not losing money in the U.S. markets are 50/50 over one-day periods, 76% in one- year periods, 98% in 5 year periods and 100% in 10 year periods.
Source: RBC Wealth Management, Bloomberg; data through 7/31/22. Data for TSX Composite goes back to 1977. Data for S&P500 goes back to 1945.
Markets’ Retracements
Markets around the globe are undergoing a re-valuation as benchmark interest rates and therefore cost of capital continue to rise. The trajectory of interest rates hinge on central banks’ ability to rein in inflation and the path for financial assets is still uncertain until we are able to reach a new steady state for interest rates.
SP 500 and TSX Composite have repriced significantly with TSX Composite now one standard deviation below its long term average.
Source: RBC Wealth Management, Bloomberg; data through 9/30/2022
What remains as a foreseeable risk factor is earnings growth. Corporate earnings estimate have come down, however, there may still be room for more on the downside and that can potential test the markets’ resilience.
Decelerating economy will test the resilience in corporate earnings outlook
Source: RBC Wealth Management, Bloomberg, FactSet, Refinitive I/B/E/S; data through 9/30/2022.
On the other hand, fixed income after years of delivering negative real returns, yields have now becoming increasingly attractive and can provide additional shock absorbance.
Return profiles in fixed income markets look increasingly reasonable
Source: RBC Wealth Management, Bloomberg; data through 9/30/22.
It may seem counter-intuitive, but stock markets only pay attention to future events. The current markets’ retracements have already priced in a mid-level recession. As a leading indicator, it’s important to remember that most of the time markets bottomed before recessions have ended.
S&P 500 corrections surrounding recessions
Source: RBC Capital Markets U.S. Equity Strategy, Haver Analytics, RBC Wealth Management.
As a final point, it’s worth re-iterating why market timing is so difficult and why staying invested over the long term is the winning strategy. Numerous studies have demonstrated that timing the markets actually detract from performance and missing a few best performing days can be detrimental to long term growth.
Staying disciplined and invested crucial to achieving long term objectives
Source: RBC Wealth Management, Bloomberg; data through 4/30/22 calculations based on daily data from Jan 1980 to April 2022.
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.