As was inevitable after an 11-year-long bull market cycle, we officially entered market correction territory on Wednesday, March 11th.
The oil war between Saudi Arabia and Russia and the corona virus contributed to this downturn and to extreme fluctuations.
It is essential not to panic during a volatile period. If your portfolio accurately reflects your investor profile, the fall in share prices may be unpleasant, but will be bearable. This is why every time I review your investments, I make sure they reflect your profile, because once a market fall begins, the time to reduce portfolio risk has already passed. Now is the time to maintain the status quo at least, or at best, for those who can afford it, to take advantage of the situation and temporarily and strategically increase the stock weighting of your portfolio by buying into solid companies that are trading at advantageous price and which will eventually recover their intrinsic value. Many investors are asking me when we’ll hit rock bottom, so that they know when to invest more. Unfortunately, no one can predict that, but what I can tell you is that at the price some companies are trading at right now, they represent excellent opportunities.
The current crisis will touch some sectors and some countries harder than others, and that hits at the heart of why it is crucial to diversify one’s portfolio. I would even go further: some companies will benefit from the current situation. One only has to think, for instance, about medical supply companies, videoconferencing supply providers, e-commerce sites, whichever pharmaceutical company comes up with the longed-for vaccine, and so on.
For me, what’s most troubling in the long-term isn’t so much the stock market, but the bond market. The bond market has seen insane performance over the past year, considering its starting interest rates. Given current futures prices and low interest rates, we shouldn’t expect much out of this asset class for the next decade. The US Federal Reserve even sprung for two surprise reductions in the federal funds rate, hoping to stimulate the economy. The average return rate on 10-year bonds is currently below 1%. Retirees, very conservative investors and pension funds will have to revise their revenue projections, given the economic context.
The people who will benefit from this situation are borrowers. Mortgage rates are very low and might fall even lower. If you’re about to renew your mortgage, you might be in for an agreeable surprise.
In 2016, Japan announced that it would introduce negative interest rates. It wasn’t the first country to do so, since Switzerland, Denmark, and Sweden had already suffered that fate. It was hard to imagine the impact of that kind of measure: having to pay interest just to keep your money in a savings account! Some economists are now signalling the possibility that the next recession could plunge the US and perhaps Canada into a negative interest rate spiral.
It’s clear that the next few years will bring a host of challenges, and that we will have to review how we build a standard portfolio. I will be available to guide and advise you so that you can benefit from this new economic environment.