By Canada Life Investment Management | Aug. 8, 2024
After an extended period of relatively steady global markets, investors have recently witnessed a spike in volatility and broad-based selling. As the environment shifts from a heightened fear of inflation to concerns about stability of growth, fixed income has the potential to shine and act as a stabilizer to equity markets, making balanced portfolios an attractive proposition for today’s markets.
Recent global market volatility
While markets have rebounded from recent lows, there’s potential for heightened equity market volatility to continue. The recent market volatility appears to be driven by renewed concerns about the outlook for the U.S. economy, triggered by weaker data from the U.S. labour market. The most recent jobs data shows an unexpected rise in the U.S. unemployment rate – to 4.3% in July from 4.1% in June (U.S. Bureau of Labor Statistics). This number surprised investors and drew attention to the Sahm rule1 and caused jitters in the market and investors to question the strength of the overall U.S. economy.
It’s important to keep in mind that roughly two weeks ago U.S. gross domestic product (GDP) numbers came in higher than expected, the U.S. consumer remains resilient, and we’re currently experiencing an overall solid U.S. corporate second quarter earnings season. This conflicting data is the reason analysts are questioning if this is the start of an economic downtrend or a short-term bump that’s part of a soft landing.
This market volatility is also happening as the U.S. Fed chose to not decrease interest rates at its most recent meetings (July 30-31) but has suggested a rate cut is imminent. As the Fed’s focus shifts from price stability to maximum employment, the decision to not cut rates suggests the Fed is content, at least for the time being.
Additionally, the yen carry trade (borrowing yen to buy foreign assets) appears to be unwinding due to the increase in overnight interest rates in Japan and fears of a U.S. recession. Although difficult to measure, it’s highly anticipated that more selling of U.S. and certain emerging market assets is going to continue.
Geopolitical risk continues to impact global economic uncertainty, with escalated tensions in the Middle East and an increasingly unpredictable U.S. election that could have different global economic implications, depending upon the outcome.
Sell-offs are a part of normal market activity, especially with the remarkable growth we’ve seen. Global and U.S. Equity markets have experienced exceptional returns recently (the MSCI ACWI GR CAD was up 23% over 1 year ending July 31 the S&P 500 TR CAD was up 28% over 1-year ending July 31) primarily driven by price to earnings multiple expansion, meaning what investors are willing to pay for a dollar of earnings. While there’s no reason markets couldn’t move even higher over the short term, in the long term, it’s fundamentals such as earnings growth and dividends that drive returns.
As the environment shifts from a heightened fear of inflation to concerns about stability of growth, fixed income has the potential to shine and act as a stabilizer to equity markets, making balanced portfolios an attractive proposition for today’s markets. It’s during times like these when diversified portfolios are important for long-term investors.
Portfolio Solutions Group or PSG’s focus on effective diversification, professional active management, and risk-adjusted returns can provide an opportunity for advisors to focus on their clients’ objectives and challenges rather than day-to-day market fluctuations. Well balanced portfolios that invest across different asset classes, geographies and styles can provide stability during increased economic and market stress.
Key takeaways:
- Potential for heightened equity market volatility to continue based on the following factors:
- U.S. economic concerns
- Monetary policy uncertainty
- The yen carry trade
- Middle East conflict
- U.S. election uncertainty
- The key question remains: Is this the start of an economic and/or market downtrend or a short-term bump?
- After the exceptional market returns we’ve seen, it’s not surprising that a sell-off or check-back would occur.
- Well balanced, diversified portfolios that invest across different asset classes, geographies, and styles can provide stability during increased economic and market stress.
In times of market uncertainty, staying informed and prepared is crucial and clients need your advice more than ever. Visit our market volatility toolkit for resources and tools to help navigate the complexities of market fluctuations with confidence.
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