October 2018 Market Watch

Posted 25 Oct 2018 by Rick Irwin, CFP, CLU; Patricia Bell, PFP

While the Canadian markets haven’t fared so well this year, we have been far more fortunate than the Chinese market. The American markets have actually posted positive returns despite the recent pullbacks. It seems to be another period in which skeptics find reasons to avoid investing altogether, like the periods below:

(Image Source: Dynamic Funds, Investing 101)

  Rick Irwin, CFP, CLU

2018 so far has not been a banner year for most markets. Here at home the TSX is down 4.9% for the year while the US market (as measured by the S&P 500) is up 3.5% in US dollars. The tech heavy NASDAQ, despite the recent pullback, fared much better and, despite the near 10% correction over the past few weeks, is still up 8.6%. The Emerging Markets have been hit especially hard, led by China which is down close to 30% but the broad EM are down over 15% in US dollars. European markets are in correction territory, having fallen more than 10% from their peak, and are down close to 9% for the year and closing things out the Japanese stock market is basically flat. Diversified portfolios, holding a mix of Canadian, US and International investments as well as other asset classes like bonds, real estate and alternative investments, have fared better and by their nature should hold up better in periods of market volatility, just as they do not tend to fully participate in the market’s upside in periods of strength.

 Patricia Bell, PFP

The economy is quite strong by many measures, and many experts say that’s more important the market’s daily ups and downs, but there are some factors that investors had decided to ignore for most of the summer: the ongoing trade war with China, concerns that the US Central Bank (The “Fed”) will raise rates too quickly causing a downturn in the economy, third quarter earnings could be a little lower causing pressure on profit margins, money moving out of stocks as bonds become more attractive due to higher rates.

So what’s causing the selloff? Jurien Timmer, a Director with Fidelity’s Global Asset Allocation Division uses an equation to demonstrate: Price=Earnings/Interest Rates. When earnings go up and rates go down prices increase. But the opposite is also true, when earnings go down and rates go up, prices fall. This is the ‘market math’. After a year of strong earnings growth many companies seem to be preparing their investors to lower their expectations for the 3rd quarter blaming tariffs and inflation. This may mean earnings growth is peaking.

It’s never fun to see our investments shrink in value, but it is part of the process for bull markets to experience pullbacks from time to time. In fact, it’s important not to let short term “noise” affect a carefully designed long term investment plan. While our natural reaction to the noise might be to get off the wild ride, we need to remember what’s happening in the headlines is not necessarily what’s happening in your portfolio and remember that the media is not in the business of giving investment advice.