If you’ve been keeping an eye on the losses in your investment portfolio, your hopes for a solid return this year may be sinking fast.
The selloff has been accelerating as many investors are concerned that the U.S. Federal Reserve and the Bank of Canada will have a difficult task trying to engineer a soft landing in the economy, given the challenges it faces.
Impossible to predict the timing of a market bottom
Jonathan Grant is an Associate Portfolio Manager and Senior Investment Advisor at the Grant Wealth Management Group in Orillia. Given events such as the war in Ukraine, the COVID-19 pandemic, and the oil supply shock, Jonathan’s philosophy is to construct portfolios that are more resilient.
He said, “I focus on robust diversification across asset classes, factors, and market environments. A well-diversified portfolio is unlikely to be over-exposed to the whims of the market or global events.”
Facing a challenging economic backdrop
Because of a potential risk for a recession, Jonathan maintains an overall cautious view on global equities.
There are contractionary financial pressures that may impact earnings and revenue growth well into 2023. Jonathan said, “despite the challenges, we expect Canadian equities to outperform their global counterparts on a relative basis, partially driven by continued strength in the Financials, Materials, and Energy sectors.”
Additional risks to growth
Additional risks to growth may contribute to bouts of sporadic volatility. They include, continued geopolitical instability; higher interest rates to curb inflation; continued COVID-19 restrictions in China; and tight labour markets.
Inflationary pressures continue
With the significant rise in rates, Jonathan believes fixed income exposure is an increasingly important component of a diversified portfolio. He said, “fixed income offers capital preservation, liquidity, and the potential for generating positive total returns in capital gains and income.”
Softening returns on equities
In managing portfolio volatility, diversifying your equities with alternative assets could be beneficial by potentially providing long-term protection against inflation and producing attractive returns. Jonathan said, “alternative assets can help portfolios under either transitory or more structural inflation outcomes.”
What type of bear market are we in?
There are different types of bear markets, each with different triggers and distinct characteristics.
- Structural Bear Markets are triggered by structural imbalances and financial bubbles. Often a “price shock” such as deflation follows.
- Cyclical Bear Markets are the result of rising interest rates, a looming recession, and declining profits. They are a natural function of the economic cycle.
- Event-driven Bear Markets are triggered by one-time shocks such as wars, spiking oil prices, crises in emerging markets, or technical market dislocations – that do not lead to domestic recessions.
Are we in for a rough landing?
As the Fed hikes interest rates, Jonathan believes the primary driver behind the current market volatility is the fear of a hard landing.
This is a marker of a cyclical bear market but there are also some markers of an event-driven bear market. Current market volatility can be traced back to government-imposed lockdowns and financial supports, the measures used to combat the effects of the COVID-19 pandemic.
Expect this bear market to be a shorter cycle
The main difference between a cyclical bear market which is triggered by rising interest rates and an event-driven bear market is more about the “speed” of the fall than the fall itself. For a cyclical bear market, the average recovery period is longer.
Central bankers have learned a lot from previous cycles and Jonathan said, “the expectation is that they will navigate this cycle more smoothly. We expect the length of this bear market to be a shorter cycle. We are about 5 months into this market decline, and we are anticipating a correction of about 30 per cent.”
We’ve got this
Jonathan urges investors who are fixated on the negative to step back and get some perspective. He said, “we know how to combat inflation and even though it’s causing some pain, central banks are taking action. Markets will likely stabilize and recover; it will just take some time.”
He believes a successful long-term investor….
- Stays with a proven allocation and investment philosophy
- Has a clear view about their investment decisions to produce success
- Has portfolios designed to achieve their objectives and targets of return
- Recognizes that the media and investment industry thrive in market turmoil and use hyperbolic words like rocketed, imploded, and convulsed.
- Understands that investment is about decision-making
- Can make a couple of bad decisions with a good result but can’t make a series of bad decisions over the long-term and have it end well.
Jonathan reminds investors that markets are far more volatile than the underlying entities they represent. He said, “I advise my clients to remain mindful of the 10/10/10 rules. The next 10 minutes are going to feel awful. The next 10 months and 10 years are an entirely different story.”
To contact Jonathan Grant call (705) 330-0067 or email [email protected]
Source: Bear Markets – Market Insights.
Grant Wealth Management Group is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.