After a sharp correction in February, U.S. markets turned around and rode strong economic fundamentals to new highs. But on Oct. 10, investors – spooked by a number of clouds gathering on the economic horizon – sent the market into a sudden tailspin with the Dow Jones Industrial Average falling by 3%.
Certainly, there are a number of issues facing investors, including a hawkish U.S. Federal Reserve Board, which seems determined to raise interest rates at a steady (some say rapid) pace. And while significantly higher interest rates are a threat to equities, investors also appear concerned by the trade war between the U.S. and China. This ongoing dispute has hurt emerging markets, which in part, prompted the IMF to downgrade its outlook for the world economy.
Valuations, particularly in the tech sector, are also stretched. And with tech stocks leading the 10-year run-up in the S&P 500 Index, it was perhaps not surprising that investors booked profits, which added to the sell off.
Tactical allocation in action
So where do we stand now?
We believe economic fundamentals are still solid and don’t see a recession on the horizon. But we also realize that we are late in the economic cycle and risks are clearly growing.
Over the last number of weeks, we have moved to a neutral position on equities in general, and have taken a number of steps to potentially lower risk in the Sun Life Granite Managed Portfolios. One of the key tactics was to adopt a protective options strategy on U.S. tech stocks. We also recently deployed an options strategy on volatility that benefited the portfolios as market turmoil increased.
We are in a seasonally volatile period and the markets may get bumpier from here. However, as always, whether we are taking steps to reduce risk or looking for opportunities to invest, our focus is always on the long term.
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Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.
© Sun Life Global Investments (Canada) Inc., 2018. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.