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Watch the Horizon, Not the Waves

Watch the Horizon, Not the Waves


By Elaine Kelly – May 2019

The first Quarter of 2019 saw a sharp reversal in global equities, rebounding strongly from weakness in fall of 2018.  This week, investors saw another sharp reversal in the stock market – this one to the down side.  If you are watching these ups and downs closely, it can make you nauseous – just as watching the waves from the railing of a boat can make you feel sick.   However, just like the solution sailors found long ago, if you watch the horizon, your seasickness will subside.   If you have a solid financial plan, keep your eye on that, and your progress towards your long-term goals, and you are likely to feel much better.  

Stocks fell for five days in mid-May, making the S&P 500 look ready for its biggest weekly drop of the year.  This drop resulted from US-China trade talks faltered and the US put new tariffs on Chinese goods, and investors feared lower corporate profits and weaker economic growth.  A one-week move could make some people nervous.  

However, if you returns over a bit longer than one week, you’ll see a different story.  As of May 10, 2019, the S&P/TSX had a one-week return of -1.19% and its returns remain +13% Year To Date.   In the US, the S&P500 had a one-week return of -2.18% and a year to date return of +14.9%.  The biggest drop last week was -5% from the Hang Seng index, which still remains +10.46% year to date.  With year-to-date returns like this, your portfolios should remain on track to achieve your goals.  

Meanwhile, on interest rates, we have also seen a strong reversal.  Last summer, central banks increased interest rates based on global economic strength.  The expectation was for five more interest rate hikes in 2019/2020.  The US Federal Reserve raised its rate four times in 2018 from 1.25 to 2.25.  The Bank of Canada did three rate increases of 25 basis points each in 2018.  These rate increases mean weakness for bond portfolios.  However, in 2019, the US Federal Reserve is indicating that they’re done with tightening.   With low inflation and flat interest rates, and if corporate earnings stabilize, any recession would be short lived.   

Let’s look at four tools to help understand the markets.  You can get further details by looking at these interactive tools:  

  1. Past Market Crises:  Canadian markets recovered from the Sub-Prime crisis of 2008 in 28 months; Diverse portfolios always recover in the long-term; make sure you have enough money to meet your income needs in the short term, so you can allow your investments the required time to recover
  2. Timing the Market:  It is impossible to predict in advance when the best and worst returns will occur in the markets.  Missing just a few days of good performance can significantly reduce your overall return. 
  3. Stock Picking:  within a stock market, individual companies can perform very differently.  A professional manager can help you invest in companies that have the potential to perform well in the long term.
  4. Unpredictable returns:  Generally, the range of returns in any one-year period is much larger than the range of returns for an investment held for a longer period.  The longer you remain invested, the more predictable your returns become.  

Looking forward

The first quarter of 2019 was the best quarter for stocks in 10 years.  There is bound to be some pull-back after returns of 6 to 12% in just a few months.    Because we have been in a long period of economic expansion, a balanced asset allocation and a defensive approach throughout the year may serve investors well.

Elaine Kelly MBA CFP FCSI

Senior Investment Advisor, Manulife Securities Incorporated