The trigger appeared to be a spike in U.S. bond yields late last week, after data showed U.S. wages increasing sharply, which could trigger rising inflation and higher than expected interest rates.
For many market participants, the selloff, which saw the Dow drop 1,175 points on Monday before rebounding on Tuesday, seemed to signal a sea change. But we don't share that view. Rather, we see the sudden drop as a technical (and even welcome) pullback in an ongoing bull market that needed to let off some steam.
Simply put: we believe investors can take comfort knowing that the fundamentals that supported one of the longest market rallies in history haven't really changed. In fact, we believe they may have improved even further in recent months. The global economy is gathering strength and we expect it to grow at over 3% this year.
On top of that, the tax cut package passed by U.S. Congress at the beginning of the year may give the country's economy an added boost. The reduction in corporate tax rates should help keep earnings healthy.
Certainly, we've been in a long period of record-low interest rates and muted inflation. At some point that will change. However, we don't think investors need to worry about a sudden burst in inflation, and we believe the U.S. Federal Reserve will hold to its plan to raise interest rates three times by year-end. This would still leave us in the relatively low interest rate environment that has supported the market for years.
All this makes it difficult to support the case for a protracted bear market. And this should help give investors the confidence to stay course through this volatile time.
Tactical allocation in action
Our tactical approach came into play as we watched the exuberant market action over the course of January. When sentiment indicators moved into excessively bullish territory, we used options to hedge our equity overweight position in our Sun Life Granite Managed Portfolios, and as the market tumbled we took profits on the hedge.
We believe that much of the excess bullish sentiment has been wrung out of the market. This has opened the door for us to reposition the Granite Portfolios to take advantage of opportunities created by the recent volatility.
When you're in it for the long haul, market downturns are simply part of the deal. And no matter what happens in the short term – whether we're taking steps to reduce risk or seeking opportunities for added returns – our focus remains, as always, on our long-term investment objectives.
Sun Life Granite Managed Portfolios invest in mutual funds and/or exchange traded funds (ETFs). Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
This commentary contains information in summary form, for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. and/or its affiliates. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.
@Sun Life Global Investments (Canada) Inc., 2018. Sun Life Global Investments (Canada) Inc., is a member of the Sun Life Financial group of companies.