Optimism During All Market Cycles

By Craig Fehr April 25, 2018

The first quarter is in the history books, and there was a fair amount of action in the markets. Today, we'll take a look at recent economic headlines and then turn our focus to why investors should remain optimistic during all market cycles.

After trending near record low levels for much of 2017, market volatility made a comeback in the first quarter. Concerns of rising inflation and the potential for more aggressive policy tightening from the U.S. Federal Reserve sparked initial volatility. Daily fluctuations in the stock market averaged 0.9% in the first quarter, three times the average for all of 2017.1

Speaking of market moves, we experienced the first official stock market correction in two years when the S&P 500 fell 10% from its January highs. Likewise, the TSX was also under pressure, dropping 8%. Canadian and U.S. stock markets have now experienced four and five 10% corrections respectively since the bull market began in 2009. For some perspective, stocks have historically averaged one correction per year.

We saw changes in interest rates during the first quarter. And while interest rates are still at fairly low levels historically speaking, they moved notably higher in the quarter. Ten-year rates in Canada and the U.S. rose to their highest levels since 2014, reflecting economic growth and firmer inflation expectations. Two-year rates rose above 2% in the U.S. for the first time since 2008, with domestic yields below 1.8%, indicating recent and upcoming rate hikes from the Fed.

Amid all the fluctuations, there are reasons to be optimistic.

First, economic fundamentals are intact. Economic growth is the foundation upon which bull markets are built. U.S. unemployment is at the lowest level since the late '90s, wages are improving, and business investment is picking up. In Canada, while we think the pace of growth will slow this year, the economy is still poised to grow at a modest rate of just below 2%. In fact, in the past 50 years, every bear market (except for the "Black Monday" decline in 1987) was accompanied by a recession. However, we do not see a recession emerging soon, suggesting to us that this pullback is not the prelude to a prolonged, more severe bear market.

Second, the profit picture appears promising. A look at historical corporate earnings and market performance shows that profits tend to be the most influential driver of stock prices over time. Investors should take comfort in this relationship, as corporate earnings have been strong recently and look poised to move higher in the coming year.

Third, we've been here before. Having just closed out the longest stretch on record without even a 3% decline in the market, memories of past pullbacks may have faded heading into this recent period of volatility. It's worth remembering that this is not new territory for this bull market. Since this expansion began in 2009, there have been four 10% corrections and 24 5% declines. In 23 of those 24 instances, the market was higher three months later, with an average return of 8% during that time.2

We expect ongoing volatility in response to policy changes, gradually rising rates, persistent economic growth, and favourable international market performance. We think investors should position with increased diversification and realistic expectations.

Talk with your advisor about how market moves can provide new opportunities for your investing strategy.

Important Information:

1 Source: Daily price change for the S&P 500.

2 Source: S&P 500 total return. Past performance of the market is not a guarantee of what will happen in the future.

Equity investments carry risk, including the loss of principal. There are special risks inherent in international investing, including currency, withholding taxes and high levels of taxation, political, social and economic risks.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

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