Why did the market fall?
According to Adatia, recent events signal a pullback rather than a market correction. It is important to note that the US equity market has been steadily climbing for almost nine years. Substantial corporate profits, strong economic growth, and low inflation helped propel indices to all-time highs in 2017. As a result, declines in 2018 look worse than they are, given the strength of the market. Since the lows reached during the global recession in March 2009, the S&P 500 index has recovered almost 300%, and the Dow Jones, more than 140%.
“You have to put the declines in the context of otherwise substantial returns,” says Adatia.
It’s impossible to pin down the exact reason stocks tumbled so much earlier this month, but experts believe fears of rising interest rates and inflation and high valuations contributed to the recent volatility.
The effect of rising interest rates
In the United States, the Federal Reserve left interest rates unchanged after its last meeting in January, but observers expect three more tightenings by the end of 2018. The Bank of Canada raised its policy rate from 1.00% to 1.25% in January. Interest rate hikes worry investors because they affect consumer confidence in their financial situation and the state of the economy as a whole.
“Our two biggest problems in Canada are high consumer debt and an overheated real estate market,” says Adatia. Rising interest rates influence these two parameters, which themselves influence consumer confidence.” However, it is consumer confidence that drives spending. And when consumers are more indebted or worried about the economy, they spend less, which reduces corporate profits.
Are stocks overvalued?
Although some experts blame the market’s decline on excessive valuations, Adatia points out that the fundamentals of many stocks – the data analysts use to gauge a company’s financial health, store or another security, such as earnings, growth or liabilities – are mostly still healthy. “We saw a lot of volatility the week of February 5,” he admits. However, the basics are still relatively good, so this is, in my view, a setback rather than a correction.”
And inflation?
Inflation has been relatively low for a very long time, and investors believe that this change is long overdue. A jump in inflation would affect both consumer confidence and corporate earnings. Consumer prices are likely to start to rise soon, boosted in particular by strong US employment figures, but Adatia thinks a sharp rise is unlikely because the Fed plans to manage it by raising interest rates this year.
What to do? Keep calm and persevere.
Don’t get overwhelmed by the headlines. If you’re concerned about the performance of your investments, talk to your advisor instead. “If you’re worried, why not see your advisor to reassess your risk tolerance? By raising your concerns, you may be able to rebalance your portfolio to a more conservative allocation,” Adatia advises. And if you don’t have an advisor, now is a great time to find one. An advisor can help you define your investment goals and answer your questions during volatile times.
Remember that even if your investments may have lost value, this is a theoretical loss, which will only become real if you sell them. That’s why the best thing to do is weather the storm since stock prices are likely to rebound. The major indexes have already started to recover from their decline of the week of February 5.
The stock market is volatile. The next time it experiences a significant decline, which it inevitably will, your best bet is to stay calm put the numbers into context, and call your advisor if you have any concerns. Your advisor will help you better understand how current events may affect your long-term goals and show you that it is best to focus on a long-term strategy.
