Your Money: Volatility in perspective
By Medicine Hat News on December 22, 2018.
Market corrections, even modest ones, will bring out the doomsday agents. But as headlines roil the markets, it’s important to note that the stumbles we’ve experienced recently are not the result of a weak economic outlook, and are at least partly attributable to the tightening monetary policies of central banks around the world. Most of the precursors we’ve seen in past recessionary environments are not in place today. Indeed, a number of factors argue against the idea that we are in the early stages of a bear market, but rather suggest that we are experiencing a correction in a long-running bull market that, while ridden hard, still has a ways to go. The first factor against a possible bear market has to do with “valuations.” The current S&P 500 P/E ratio is about 16.2x, which is not absurdly high. In fact, it’s only slightly above an average of 16 times since the 1950s. Similarly, most major global indices now sport valuations that range from fair to undervalued. Equity markets are likely to remain challenged in the coming months until the path of the economy becomes more certain. Secondly, lets examine the “recessionary indicators” that point against a bear market.Nobel laureate Paul Samuelson in 1966 proclaimed that the stock market had “accurately predicted nine of the last five recessions.” In the 50 years since, stock markets have no more learned to predict a recession than pigs have learned to fly. In fact, their track record has possibly gotten worse. The next factor that could be against a bear market situation are that of interest rates. Many believe the U.S. Federal Reserve (Fed) has an unofficial mandate to maintain market stability. In recent weeks, the Fed has taken a page from the Bank of Canada in moving away from forward guidance andtoward a more flexible data-dependent policy. While a December Fed rate hikeoccurredon Wednesday, 2019 hikes are less certain to themagnitude of whathappened in 2018. “Inflation” figures is another reason why we may not enter a bear market.U.S. inflation remains low, at around two per cent, and there are few signs that it’s starting to boil over. Price pressures for core services can best be described as steady. Meanwhile, a strong U.S. dollar and a competitive retail sector are keeping core goods inflation weak. Finally, “trade” is another unknown reason and factor that could push us into or prevent a bear market.Equity markets adopted a cheery stance in the wake of reports that a 90-day truce had been signed in the U.S.-China trade war, and it looked like frozen negotiations were about to thaw. Inthe following days, the China side remained silent, while the U.S. side tempered expectations and clarified that the 90-day truce was retroactive to Dec. 1, leading the markets to slide. As stated and presumed in the past, this trade war from time to time will cause market volatility. To sum things up:declining momentum + uncertainty around trade wars + uncertain global growth + uncertain path for the Fed + flattening yield curve = a nervous stock market! Overall,”defensive” isthe name of the gameright now. Please meet and review with yourinvestment advisor, certified financial planner to see what impacts thismarket volatility is having on yourwealth and long-term plans with your money. For a further discussion around your financial and investmentplanning strategies, please contact me, Neil Mardian, CFP, FSCI, CIM, M.Sc. (Mgmt) (403) 504- 3026 (neil.mardian@td.com). 10-9
