Markets have turned volatile - What now?
Opinions as of November 6, 2018
A Q&A with Sadiq S. Adatia, Chief Investment Officer
Volatility in perspective
Markets were volatile in October and, for many investors, daily headlines about moves of one or two percent are uncomfortable. Intellectually, we know that stock markets tend to go up over the long term, and that short-term volatility is part of being invested in the market. But when the reality of volatile markets hit home, it’s hard to be emotion-free.
Here’s something to keep in mind: If you have a well diversified portfolio, with an asset mix that’s well aligned with your risk appetite and your investment time horizon, you may be better able to ride out the volatility and focus on the long term. In fact, our diversified Sun Life Granite Managed Portfolios seek to manage short-term risks and generate opportunities through both strategic and tactical asset allocation.
If you are still concerned by short-term moves in your portfolio, reach out to your advisor to ensure that your portfolio is well aligned with your risk appetite. Remember, Granite portfolios come with a risk profile, from conservative to aggressive and with a time horizon to suit your needs.
Bumpy markets in October
It was almost two years ago that Donald Trump won the U.S. presidential election, promising to boost the economy with a massive tax cut. Investors, sensing increased growth ahead, immediately embraced Trump’s plan with the U.S. market climbing to a record high. There have been bumps along the way, including a 10% drop in February when the market let off some steam before moving higher again.
However, volatility has returned, with the entire year’s gains on the S&P 500 erased at one point in October. This time there are a number of economic issues that may hinder the market’s advance, including rising interest rates, slowing corporate profits and a trade war between the U.S. and China that may be damaging global growth.
To shine a light on the road ahead, we asked Chief Investment Officer, Sadiq S. Adatia, for his insights.
Investors have been whipsawed by some pretty big swings in the market lately. What’s triggering the volatility this time?
Worries about the fallout from the tariff war between the U.S and China have been weighing on the market. And tied to that has been the cautious outlook given by a number of CEOs, who have reported that earnings could be hurt by the trade dispute. As well, the U.S. mid-term congressional elections could trigger a reaction in the market.
How does this current bout of volatility compare to what we’ve seen late in bull markets in the past?
Volatility does pick up normally around this time of year, with September and October tending to have higher volatility. In addition, volatility gets higher late in a bull market cycle. And, I should point out that we are in the tenth year of the current run-up in the S&P 500 – one of the longest in history.
We’ve seen corrections in this bull market before, with the market then moving on to new highs. Is it different this time?
It’s too early to tell yet, but there are early indications that suggest hitting new market highs in 2018 may be a bit more difficult, given that some of the stronger companies have slightly missed on their third-quarter earnings. These are the same companies that would normally lead the markets higher, and so without them, new leaders need to emerge, which is unlikely at this point. This does not mean markets can’t go higher from here, but we don’t expect the strong gains that we’ve seen in recent years.
You have moved to a neutral positon on equities in general in the Sun Life Granite Managed Portfolios. What’s your outlook today?
We remain roughly neutral, but our bias is heading lower. You would likely see us reducing our equity weighting if the markets move higher from here.
You recently took a number of steps to reduce risk in the portfolios, by deploying hedges, including options. What’s behind this strategy?
In volatile periods when you get big swings in the market, we believe it is prudent to have hedges in place to protect some of our positions. We did this with technology stocks during the tech sell-off earlier in October.
Why are the Sun Life Granite Managed Portfolios appropriate in this environment?
The Granite portfolios are designed to be very well diversified across both equities and bonds including non-traditional asset classes, as well as across various geographies. This helps smooth shocks in any particular region or asset class.
Furthermore, the tactical approach, including the Sun Life Granite Tactical Completion Fund, gives the SLGI portfolio management team the ability to adjust the portfolio to reflect the current environment. And this could include the use of hedges or other downside measures. It also gives us the ability to take advantage of opportunities that may also present themselves during sell-offs.
Finally, what advice do you have for investors in a volatile market like this?
The key is to always think long term. If you go back and look at market history to see what happened to the market five years after a major selloff, you’ll find that they have normally rebounded back. And so the pullback we’ve been through in recent weeks could be an opportunity for investors who are patient and have a longer time horizon.
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