Following one of the least volatile years in decades, 2018 quickly reminded us that volatility is just around the corner, and in an unpredictable fashion, can return with a vengeance. Global markets were down almost everywhere, with December being the worst December since the 1930’s.
2017 ended with positive returns, reasonable inflation, good GDP growth, strong earnings growth and synchronized global growth for the first time since 2008. Despite the positive outlook for 2018 at the end of 2017, several economic and geopolitical developments have been attributed to the market gyrations of 2018:
- Increasing trade friction between the U.S. and its trading partners.
- Troubled Brexit negotiations in Europe.
- Slowing economic activity.
- Rising short-term interest rates leading to tighter financial conditions.
- Flattening yield curve and concern for a potential recession in the short term.
Whatever the reasons, volatility such as what we experienced in 2018 can be overwhelming and cause us to be anxious at times. However, we must accept that volatility in the markets is normal and needs to be weathered with patience and conviction that they are temporary. Steep market declines exceeding 10% are common. Historically, losses of 15% or more happen every 1.5 years on average, despite markets showing annual positive returns in 29 of the last 38 years.* The fact is, market volatility is not always a bad thing as it creates opportunity to add higher-quality businesses at reduced prices.
Despite current negative headline news and concerns for reduced global growth, current conditions suggest a cautiously optimistic outlook for markets in 2019.
- Most leading indicators suggest that recession probabilities in the short term are relatively low. **
- Real rates continue to be low by historical standards.
- Inflation remains moderate.
- Current valuation levels in Europe, Asia and especially in Canada have created some attractive risk/reward opportunities.
- Central banks seem sensitive to the risk of hiking interest rates too much too fast.
- In the absence of recession, the market tends to recover faster.
- History suggests investors can profit from market declines. ***
While it can be difficult to set aside short-term distractions and maintain a long-term goal oriented perspective given all the negative headline news we are bombarded with, what helps is looking back over the longer term. The most recent market decline could be viewed as a temporary setback in an otherwise strong upward run. Most importantly of all, this short term correction will not impede a good long term plan.
Moving forward, we are balancing the need for downside protection with the opportunity cost of not participating in an equity market upside. Our goal over the short term is to continue to add diversified strategies that give us lower correlation to traditional markets in order to reduce volatility within our portfolios but still cautiously participate in any potential upside.
Cattelan Private Wealth Counsel Team
*iA Wealth, Fund Research, December 2018
**iA Financial Group Market Review 2018 and 2019 Outlook: Credit Suisse, December 2018
***iA Investment Management Inc., Market Commentaries, November 2018