Pain is only temporary
Sadiq S. Adatia
Opinions as of August 28, 2015
FOR CLIENT USE WITH ADVISOR
STOCK ROLLERCOASTER SETS THE STAGE FOR LONG-TERM INVESTORS
Global stock markets have seen some wild swings in the past few days, certain to make investors anxious. But those who keep their heads and stick to their investment strategy will recognize this kind of short-term uncertainty for its potential to create long-term opportunity. Investors with cash who've been hesitant to enter the market may want to speak to their financial advisor about how best to navigate the current climate.
Let's start by getting some perspective.
The S&P 500 has been in rally mode since 2011 without a 10% correction on a close-to-close basis. That's the third-longest run since WWII – a healthy bull run by any measure. Since the crisis low of March 2009, the index is up 221% to August 24, including dividends.
The market gyrations we're seeing may feel scary now, but historically, this level of volatility typically dissipates in short order. Here we look at the U.S. equity market to demonstrate the power (and frequency) of a positive rebound.
In our view, the recent volatility is due more to headline risk and jumpiness over what we feel are primarily short-term factors. Global equity markets have been primarily keying off concerns of an economic slowdown in China as the Chinese stock market resumes its fall. We feel the drop in global equity markets is overdone and that investors may be overlooking strength in consumption and services activity as China seeks to further rebalance its economy away from export and manufacturing-driven growth.
For our second look at U.S. stock market behavior in tough times, we present the five-year gains that followed some of the most challenging conditions on record. Of course the past doesn't guarantee the future, but this clearly demonstrates that sticking with stocks has indeed been a successful long-term strategy.
Source: Bloomberg. Data as at August 24, 2015.
And let's not ignore bonds. Yields are falling as investors seek safe-haven assets, proving once again the value of a balanced portfolio in times of equity market turmoil.
Still, setting aside the value of a fixed income allocation as a portfolio's primary volatility-reducer, when it comes to returns bonds have little to offer. This is why despite the equity risks, from a long-term perspective, we continue to favour stocks over bonds for investment growth.
1All data for FTSE TMX Canada Universe Bond Index represented by iShares Canadian Bond Index ETF.
2Not a consensus estimate. The P/E ratio of the FTSE TMX Canada Universe Bond Index is calculated by taking the inverse of the index's yield to maturity (column three). This is a way of comparing bonds to equities from a valuation perspective.
3Yield to maturity.
Sources: Bloomberg, www.BlackRock.com. Data as at August 24, 2015.
There are indicators pointing to a potentially stronger second half for China this year. Commodity prices are lower and home prices are rebounding. Home prices are much more important than Chinese stock prices given that most of China's household wealth lies in homes.
Data indicate the U.S. economy is doing fine, and in some areas, better-than-fine. The housing market and the auto industry are two standouts. Lower oil prices will be adding more to disposable income. Jobless claims are at a multi-decade low and employment is growing at the fastest pace since the 1990s, with consumer balance sheets looking healthy. It bears noting that U.S. exports to China make up only 9% of total U.S. exports.
There remains uncertainty on when the Federal Reserve will raise interest rates but expectations are that it will be a small and slow liftoff. In short, we feel U.S. equities continue to look attractive.
Our view on Canada has been negative for some time and remains so now. The impact of low oil prices remains a significant factor. Alberta, Saskatchewan and Newfoundland and Labrador will feel more pain, while Ontario and B.C. are likely to benefit from the cheaper oil. Overall though, we see continued challenges ahead.
Looking more closely at oil, we expect higher supply to keep a lid on prices. Still, we feel stocks in the sector may have been beaten up more than is justified. We see long-term opportunities here.
In Europe we believe that a weak euro, improving business confidence and a better employment situation – not to mention stimulative monetary policy – should help drive the economy in the right direction. Problems with Greece haven't gone away but the situation appears to have been back-burnered once again. We like European equities, but we expect a bumpy ride.
We had raised cash some weeks ago in anticipation of a certain degree of volatility and so now we find ourselves studying the landscape for tactical entry points, specifically in the U.S. equity market and the energy sector. Overall we remain confident in our views with a bias toward cautiously growing our equity allocation.
The bottom line is that in times like these a "stick-to-the-plan" strategy is often the most prudent – providing the plan is still meeting its objectives. Investors may want to speak to their financial advisor about strategies that incorporate elements of capital protection, growth and income to help ensure the bases are covered in good times and in bad.
© Sun Life Global Investments (Canada) Inc., 2015. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.