Making Investment Decisions in Volatile Markets – Part II
In our June commentary, we pulled together some of the key economic indicators related to current market volatility. If you want to review that blog, click here.
Since June a lot has happened, but when you cut through the noise, not that much has changed.
SO, WHAT HAS CHANGED SINCE JUNE?
Investor Fear is Moderating
Investor fear as measured by the Volatility Index (VIX) has moderated somewhat, but it is still well above the long-term average.
Inflation is Moderating but Still too High
There are signs that inflation is moderating but it is still much too high. Canada’s July inflation rate of 7.59% was down from the June high of 8.13%, reflecting a decline in the cost of energy and food. While still painfully high, at least the torrid pace of increasing prices has slowed. The long-term average is 3.13%.
Even without energy and food, the core Inflation rate for July was 5.53%, up from 5.33% last month.
The Market Rallied in July
We had a rally in the equity markets in July. It could mark the turnaround, but the more probable scenario is that the bear market continues its downward trend. Either way, it is important to keep a strategic perspective – to look past the current declines and remain focused on the factors and themes that provide guidance and long-term investment success.
More Volatility is Expected
Historically the period from mid-August to mid-October is the most volatile time of year for equity markets. In addition to this seasonal volatility there are continuing and possibly escalating geopolitical tensions and uncertainties. The war in Ukraine continues. The anti-democracy movement in the United States appears to be gaining momentum. In the run-up to the US mid-term elections in November, more social unrest, political violence, and domestic terrorism is expected.
SO, WHAT NOW?
Focus on Investment Themes and Factors
It is important not to get caught up in the political narrative. If you can be patient and avoid “short-termism,” you can always find opportunities to pursue. Considering the anticipated volatility, we are recommending continued caution, but it is time to start moving gradually (“layering”) into new holdings or investment strategies. This is sometimes referred to as dollar cost averaging.
Focus on the investment themes that are prominent now and that are expected to dominate for the rest of this decade. Here is a sampling:
Digitization and migration to the cloud is a powerful trend. Businesses are not going to stop spending on these technological advances even if we have a global economic slowdown or recession.
Onshoring or near-shoring and automation has become a significant trend because of the experience of the pandemic and continuing political tensions between world powers. All sorts of businesses are impacted by this. The US is making substantial progress in bringing home key manufacturing capacity and in creating relationships with Canadian and Mexican suppliers who are near the US. Robotics is booming in this era of deglobalization.
Alternative energy sources and electric vehicles are the focus of much innovation and increased interest due to the Russian invasion of Ukraine. Reliable energy sources – traditional and renewable – are required as the global energy demand continues to rise.
Remote health, telemedicine and precision healthcare are leading us to a brighter future in the delivery of healthcare. Biotech is making major breakthroughs in many different fields of medicine.
Focus on the factors that meet your investment objectives. Currently the factor of quality is at the top of our list. We are in the later stage of the business cycle when quality and momentum are desired factors.
Using Factors to Navigate the Business Cycle
KEEP AN EYE ON THE TOOLS & RESEARCH
Discipline at this stage of a bear market is always challenging. Initially fear of loss sets in. Then, at the first sign of a turnaround (or bear market rally), this fear often gives way to FOMO, the fear of missing out. During periods of uncertainty, it is particularly beneficial to use rules-based decision-making frameworks. Long-term investment success rarely comes from decisions based on emotion, whether that emotion is fear or greed.
If you are curious and want to explore our approach in greater detail, add it to the agenda for your next portfolio review.
In the meantime, enjoy the remaining summer days and we’ll be in touch regarding portfolio rebalancing.
The information in this commentary is for informational purposes only and is not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Fraser & Partners Investment Services of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.