The stock markets were more volatile in 2018 than in previous years. The sharp declines of the U.S. indexes in the week of December 17 and their sudden rebound the following week are a prime example. Fluctuations like these are worrisome for many investors. That is why it is important to put them into perspective.
From 2012 to 2017, the FÉRIQUE Balanced Portfolio generated a positive return each year. These good results were due partially to the wave of optimism that prevailed on the stock market, sustained by accommodative central banks, which inflated the value of stocks. In 2017, these strong gains reached the point where we were somehow borrowing from the future. Reality had to catch up with us sooner or later.
The contrast is obvious: most asset classes had positive returns in 2017 but the opposite occurred in 2018. Why did this change happen? Despite the clouds gathering on the horizon, the signals were simply ignored for quite some time amid the prevailing optimism. Conversely, the mood on the markets was rather pessimistic in 2018. Many events justify this turn of events and the resulting volatility.
The decline of the U.S. stock market in the week of December 17 was due mainly to a decision by the U.S. Federal Reserve to raise its key rate for the fourth time in a year, bringing it to 2.50%. It was also an outcome of the uncertainty created by the perpetually dysfunctional White House: the sudden decision to withdraw from Syria, the resignation of the Secretary of Defence, the budget impasse, and so on. Lastly, the arrest of several Canadians in China and the drop in oil prices also contributed to the gloomy mood.
Is the uproar over the market correction exaggerated? Possibly. The global economy still has a relatively solid footing, even though it is on a slightly downward trajectory. Moreover, in a context in which most companies are still reporting high earnings, the market declines have brought the valuations on the world’s main stock markets down to reasonable levels.
We are entering a delicate phase where each economic fundamental, each political event, etc. will be scrutinized and may cause a strong reaction in one way or another. Even so, many firms of portfolio managers and economists are forecasting positive returns in 2019.
As we have pointed out repeatedly, diversification is vital for investors because it reduces volatility. Similarly, all investors should respect their level of risk tolerance when they invest. Market movements should be considered in this context.
Finally, for long-term investors who have a high risk tolerance and therefore a bold profile, the recent turmoil is part and parcel of the cycle. The past has shown many times that, over the long term, it is better to remain invested to obtain solid results.
To learn more about market volatility, consult the fall 2018 issue of InfoFÉRIQUE on our website at ferique.com/en/information-center.
If you have any questions about your situation, speak to an Advisor and Mutual Fund Representative of Advisory Services at FÉRIQUE Investment Services.
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