Welcome to the Chalten Investment Review for Q2 2018. In last quarter’s review we dedicated some space to reminding investors that the best way to deal with market volatility is to be prepared. Being prepared means an appropriately targeted asset allocation, broad diversification and disciplined rebalancing. When we’re prepared we can watch the oft peculiar gyrations of the market with interest and curiosity rather than angst over what action to take.
Stock market performance in Q2 was very different to that of Q1, in particular the relative performance of Canadian stocks versus International stocks in Q2. After being down nearly 5% in Q1 and with economic clouds looming around trade, real estate and consumer debt levels, who would have predicted a near 7% turnaround in Canadian stocks over the next three months of the year? While we’re sure some people indeed got that call right the evidence shows that most market timing calls are ill-fated and being successful over longer periods of time by trying to time markets is near impossible.
“Time in” the markets, not “timing” the market!
We’ve seen the above adage attributed to almost every investment guru there is but have never been able to identify the original source – nonetheless, we like it. Even some of the most legendary active stock pickers shy away from trying to time markets. Benjamin Graham in his classic “The Intelligent Investor” wrote:
“In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.”
We encourage investors to heed this wise advice. We received a lot of questions at the beginning of Q2 not only about what direction we thought the market would take for the rest of the year but also a lot of concern about Canada. In Q1 “Mr. Market” (another Graham allegory – Benjamin Graham that is, not our Graham!) had continued its relative attack on Canada and the outlook from many commentators wasn’t exactly rosy….but the Canadian market performed very strongly in Q2, even in June after friction with trading partners at the G7 summit. How is this possible?
While markets sometimes react concurrently to news events in a direction that seems intuitive, they just as often confound our expectations. Markets reflect new information in real time but it’s very difficult to determine how new information will impact the complex and dynamic world economy and in turn how that will be reflected in securities markets.
And remember, timing the markets successfully doesn’t just involve one decision. Playing this out a bit, what if you were to sell now and you were right or lucky and the market dropped 20% next week. What would you do? Being right not only involves getting the sell decision right but you have to buy back in at the right time too. If the news flow and market commentary is making you think you’d like to sell now, we will guess that after a 20% drop the market commentary and sentiment will make you never want to buy again. You will be paralyzed and will likely watch the market drift back up while you wait for the even bigger crash being predicted by market commentators. Or let’s say you were to sell now but were wrong or unlucky and watched the market drift 10% higher – when would you buy back in – never?
It’s just not worth putting yourself through the agony. The market crashing is not an “if” – it is a certainty, it’s just that nobody knows when it’s going to happen and attempts to time it are more likely to hurt you than help you. Legendary investor Peter Lynch said it well:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
The secret again is therefore not getting the timing right but picking the right level of risk (via the balance between stocks and bonds) that you can live with through crashes and booms alike. It’s the only way to be sure that you can achieve those great long term market average returns.
Q2 Market Review
Global equity markets were mixed over the quarter as a whole. While economic indicators in many developed countries remained benign to positive, the price of oil spiked up and the international trade situation became increasingly combative. If you’re using Mr. Market to help gauge potential winners and losers from all this, North American, European and Japanese markets increased over the quarter to varying degrees while stock and bond markets in Asia outside Japan and Emerging Markets generally declined precipitously during Q2. Is this a foretelling of the outcome of a trade war? Can Mr. Market help us write the Wall Street Journal in advance? We’ll see.
- The total return on the Canadian stock market was 6.8% for Q2 2018.
- In the US, the total net return of the S&P500 in Canadian dollar terms was 5.5% for the quarter.
- The total net return for the S&P Global ex-US BMI Index of stocks outside of the US (in Canadian dollar terms) was -0.5% for Q2.
- The Canadian dollar shed another -2.1% against the US dollar over Q2 leaving it down -4.7% against the USD for the year through the end of June.
- Total return for Canadian bonds was 0.5% over the quarter.
Financial Planning topics of interest
Mortgage payments for many people are linked to the level of interest rates and while Q2 didn’t see a rate increase by the Bank of Canada, as we write this, many expect a July rate hike. Mortgage lenders almost invariably follow Bank of Canada rate increases with increases in variable mortgage rates and posted rates for new fixed rate mortgages. Whether rates go up in July or not, the trend seems to be up so please be sure to plan for the possibility of higher future mortgage payments. In fact, mortgage rules that came into effect at the beginning of the year mean that those seeking new mortgage financing or renewing will have to pass a “stress test” which evaluates borrowers’ ability to pay if interest rates were higher.
Tax payers will have recently or will shortly be receiving their annual Notice of Assessment from the CRA which will state RRSP contribution room for those looking to save more in RRSP accounts and deduct contributions from their taxable income.
In closing we again encourage investors not to worry about trying to time the ups and downs of the market – most professionals get it wrong. We just aren’t wired emotionally and psychologically to make market timing decisions. You will likely have a better overall investment experience if you establish a portfolio that you can live with through all market conditions and change it when your situation changes, not when you think you can outguess Mr. Market.