M&A Investor Insights: It’s Not Comfortable Sensing There’s a Bear Nearby!
What’s Going on with The Markets this Year?
You’re not alone if you’re feeling a sense of concern combined with some confusion about the state of world markets at this point in 2022. The notion of a “bear” market is one which causes general fear in the population. No question about it, we’re going through a dramatic pull-back in valuations which can be disconcerting even for those who have lived through several of these cycles over the years. It’s never enjoyable to see some of our gains erode, even if, technically it’s only “on paper” for the most part.
Let’s be honest: It’s not fun.
We recognize that our clients are overwhelmingly comfortable with the notion that market prices ebb and flow, but it is unnerving when we experience a significant downturn in prices. We truly value how patient and understanding our clients have been as we journey on this less enjoyable but familiar roadway called a “correction”. Although we’ve encountered numerous corrections and recoveries in the markets over the years together, it is useful to provide some additional context and reason for what’s happening. It’s good to remember some core principles which guide our paths forward, especially when you receive mid-year statements indicating there’s been a significant pull-back.
I’d like to spend a little time in this letter discussing some of the potential reasons for the negativity we’re observing in the markets today. It’s important to remember that world markets are extremely complex systems which seem to take on a life of their own and which often work against common sense reasoning. Let’s dig into some of what’s going on to provide a little context. But before we do that, we need to take a step back and look at some recent history.
An Important Look Back:
Manulife Capital Markets team recently reviewed the last several years of interesting global phenomenon and compared market returns of the S&P 500 (the index measuring 500 of the United States’ top companies) over that same 7-year period. The question to ask yourself as you read the following list is, “how would I expect the market to have performed during this time period when such things occurred?”
Let’s take a closer look at what took place over those years:
- ISIS would control large portions of the Middle East in an extremely short period of time
- Donald Trump will be elected as President of the United States, defeating Hillary Clinton
- BREXIT will happen resulting in the United Kingdom leaving the European Union
- The United States will enter a trade war with China
- We will see negative oil prices of -$35/bbl as measured by WTI.
- Russia, the United States, ISIS, (and others) will be embroiled in a war in Syria
- The Interest Rate Yield curve will invert
- We will have a global pandemic and governments all around the world will implement severe lockdowns and travel restrictions
- After being elected, Biden shuts down the Keystone XL Pipeline
- There will be wave after wave of COVID sweeping through the world
- We will see supply and labor shortages in virtually every industry
- Most people will be working from home for at least a year, seeing their colleagues digitally the entire time
- Many small businesses will fail because of COVID lockdowns
- Russia will invade Ukraine and will attempt to take the capital city of Kiev
If most of us knew that each of the aforementioned phenomenon would occur over the last number of years we might have completely avoided investing into the S&P 500 market. We’d simple say “No thanks, I’ll just sit this one out”. However, over this same period of time the S&P 500 market nearly doubled at 98% growth!
One of the key takeaways from this example is that investment markets do not necessarily respond to headline events in the way we might initially believe, or in a way which is comfortable for us psychologically. It’s for these important reasons we employ the professional skillsets of leading investment management firms which arise from decades of experience and the wisdom which accompanies it.
Context and Reason, not Fear and Greed!
History repeatedly illustrates that both excessive gains and excessive losses in most balanced portfolios return to a normalized state after some period. Rebalancing tends to happen naturally. I refer to this as a Fear and Greed Index. The pendulum swings to both extremes from time to time but tends to snap back to a more neutral position when conditions become too extreme. Right now, we’re at an elevated fear level. Not to long ago we were at an elevated greed level. At some point we’ll find some middle ground… at least for a while. 😊
Real estate and stock markets have experienced dramatic portfolio growth over the past decade and especially in the last three years, despite the onset of the global pandemic which shocked the world to its core. Many folks have seen the approximate doubling of their residential home values, and similar returns have been seen in the stock markets, depending upon one’s risk tolerance and investment choices.
During these times of exceedingly strong growth, we have often discussed the notion that all the extra growth we’ve seen would be a “down payment for the future”, when the markets would return some of their excesses. The challenge for us is that we are never certain what will trigger such market downturns or how significant the downturn might be. This is what makes “timing” the market (trying to guess the best times to sell and buy) exceedingly difficult in the short term and near impossible to perform accurately over the long term. We do know, however, that if we have some extra “padding” of value from large growth in recent years, we are far better off when we enter a period of market declines.
Predicting the Future
How successful have you been predicting the future? Sometimes we get lucky predicting the likelihood of events taking place at some point but doing so accurately is not a reasonable expectation. This holds true not only for the pricing of investments, but also regarding political changes, regional wars, famines, floods, and pandemics. If we’re being honest with ourselves, predicting the future with precision is a near impossibility and, consequently, we do not make important investment decisions based upon such whims.
When we observe the real estate housing market having doubled over such a short period of time, many experts have admitted that such a turn of events was not readily predictable especially as we entered the global pandemic. In fact, many experts had predicted the very opposite for many good reasons! As the real estate market sits today, in a highly elevated state compared to just a few short years ago, we do not know with any degree of certainty what the future might hold for valuations:
- Will prices drop significantly over the coming few years?
- Will prices continue to grow somewhat?
- Will prices stagnate over the coming decade and then grow again?
The challenge with predicting the future of prices is that each of the aforementioned possibilities could be correct! To complicate matters further, the future of the real estate market will likely differ quite significantly depending upon one’s location (city, province, and county). Throw in a few wild variables such as the onset of a brutal Russian war, China extending COVID lockdowns while the rest of the world reopened, hundreds of billions of savings sitting idle in Canadian bank accounts, a hurricane wiping out oil refineries, new technologies which replace old energy sources, or first contact by an alien race…
Now what happens with prices?
Kidding aside, we begin to see that the price of almost anything we can measure is affected by a countless number of global variables which are too complex to reasonably understand. As a consequence of this truth, we need to rely upon the notions of wisdom, prudence, and patience to guide our paths forward. Professional portfolio managers know precisely how to handle a myriad of market conditions and it’s in our best interests to allow them to do their professional best.
One of the common thoughts we all experience when there’s a market correction is the idea that we feel the need to do something to make things better. This is a normal human reaction to something negative in our lives and is a very good thing to consider. However, it’s important to note that in working with our financial advisory firm and employing the professional acumen of many award-winning institutional portfolio managers you already have done what you need to do!
Now, if one’s long-term experience with portfolio managers has not produced good results (especially over the last three years when markets have been extremely strong), then one might consider making some important changes. Should I be making some changes this time?... would be a great question to ask! That said, it’s quite a different story if one has experienced tremendously strong returns for numerous years as has been the case with the management teams we generally recommend at our firm.
As we know from experience, markets ebb and flow and even exceptionally great portfolio managers experience downturns if there is a broad change in prices across nearly all sections of the markets. In this circumstance (as we see today), prudence dictates we adhere to the time-tested value in staying the course with current portfolio management teams. This is what our financial advisory firm is recommending for the vast majority of our clients.
Having selected a well-tenured and significantly experienced financial advisory firm in combination with a number of leading institutional portfolio managers and award-winning teams from some of North America’s finest investment firms, you have already made some of the most important decisions to secure your future. Now is the time to allow these professionals to apply their wisdom and carry us through these challenging times just as we trusted them when markets were hot.
Below is a piece produced by TD for investor education which I have found quite compelling as it relates to putting market corrections into perspective. The chart shows periods of time during which the markets did a significant downward correction and the corresponding 1, 5, and 10-year time periods following such corrections. It really speaks to the notion that a patient and prudent investment approach is rewarding. The chart below is of the 100% stock index, the TSX300. That index is much more aggressive than most of our clients’ moderate balanced portfolios, but the example still applies. Have a look at the following period of market corrections and subsequent market recoveries:
Thank-you for Your Trust and Confidence
As our firm’s nears its third decade serving the needs of clients just like you, I can attest that I’m impressed at the measured composure with which you endure the tougher times in the markets. We appreciate this very much. Our team works diligently to offer you the best levels of financial advisory and administrative services in the marketplace. We invest heavily in our human resources, education, and technology and trust that our efforts are yielding the results you’re looking for. The many referrals you’re constantly providing are a testament to our strong relationship and we are sincerely grateful. As always, our doors are open for anything you need so don’t hesitate to reach out. Have a lovely start to the summer with your families and friends!
Maurice Matte and the team at Matte & associates
Source: Written by Maurice Matte with references to
Morningstar Direct | TD Money Talk | Manulife Capital Markets