Market volatility returns. Is this a repeat of 2008?
No matter how you slice it, the autumn months have been the most punishing for investors. As the table below shows, August and September are the months where you are most likely to experience a loss greater than 5%, and October is the month you are most likely to experience the biggest drops.
The table below highlights the best, worst and average monthly returns of the S&P 500 between January 1950 and August 2014
| Average Monthly Return | Worst Monthly Return | Best Monthly Return | % losing months | % of months with losses worse than -5% | |
|---|---|---|---|---|---|
| January | 1.11% | -8.57% | 13.18% | 38.10% | 12.70% |
| February | -0.10% | -10.99% | 7.15% | 46.03% | 4.76% |
| March | 1.16% | -10.18% | 9.67% | 36.51% | 3.17% |
| April | 1.44% | -9.05% | 9.39% | 33.33% | 4.76% |
| May | 0.16% | -8.60% | 9.20% | 44.44% | 12.70% |
| June | -0.08% | -8.60% | 8.23% | 49.21% | 9.52% |
| July | 0.99% | -7.90% | 8.84% | 46.03% | 7.94% |
| August | 0.00% | -14.58% | 11.60% | 44.44% | 15.87% |
| September | -0.51% | -11.93% | 8.76% | 53.97% | 17.46% |
| October | 0.78% | -21.76% | 16.30% | 39.68% | 6.35% |
| November | 1.48% | -11.39% | 10.24% | 36.51% | 7.94% |
| December | 1.72% | -6.03% | 11.16% | 23.81% | 1.59% |
So far this fall, the trend is playing out, with September seeing the return of volatility to the equity markets. Most major markets experienced a selloff, with European and Asian markets bearing the brunt. The MSCI EAFE Index dropped nearly 7% in September, while the S&P/TSX Composite dropped 5%. U.S. equities held up relatively well, losing less than 2%.
This recent selloff has a number of market pundits predicting another significant drop as we head towards the end of the year. There are many reasons to support this view. Valuations, even after the selloff remain near the upper end of historic averages. The global economies continue to show subpar levels of growth, and the uncertainty caused by geopolitical concerns continue to rise. Add to that the worries over a global outbreak of the Ebola virus, and the markets are ripe for a continued selloff.
On the positive side, the U.S. economy is finally showing signs of creating meaningful numbers of jobs. Last Friday, (October 3), the Bureau of Labor Statistics released a jobs report that showed the U.S. economy created nearly 250 thousand new jobs, which was well ahead of expectations. The S&P 500 rallied nicely on the news, while bond investors began to worry that this was the excuse the U.S. Federal Reserve needed to move short term rates higher sooner than expected.
I am taking a more modest view of things, and don’t see the recent selloff as the beginning of the end, but more a normal selloff necessary to take some steam out of the markets. In North America, particularly in the U.S., I see the positives outweighing the negatives. Yes, valuations are high, but the U.S. economy is finally starting to show signs of creating jobs. As jobs return, so too will consumer spending, which will help to grow the top line revenues, helping to keep earnings growing. I remain positive on U.S. equities and expect they will continue to outperform for the near term.
The situation in Canada is more tenuous. Our economy continues to slow, and with consumer debt loads rising, some slowdown could be on the horizon. Factor in lower commodity demand, and the outlook is not overly positive. However, a rising U.S. dollar may help bring some benefit to our export sector, helping to mitigate some of the pressure. Under this scenario, I am neutral to slightly negative on Canadian equities.
In Europe, the much anticipated stimulus measures have failed to spur much in the way of a market rally, continued poor numbers have increased speculation that a more aggressive quantitative easing program is likely to be announced by the European Central Bank. Any further stimulus move is likely to spur a liquidity driven rally, unfortunately we cannot predict when such a rally will occur. I remain neutral to slightly negative on European equities.
The emerging markets had shown some signs of life, but increasing geopolitical concerns have caused many to pare their exposure to the region of late. Under the circumstances, I remain negative on the emerging markets, but valuations are certainly becoming attractive.
In the fixed income space, even with a stronger jobs number, I don’t expect that we will see a rapid rise in rates. In the U.S., any rise in rates will need to be done in a very measured and deliberate manner, meaning that while some increase is likely, as soon as early next year, it will likely happen rather slowly. Under that scenario, I don’t expect a big selloff in the fixed income markets.
At home, with the economy struggling, the likelihood of the Bank of Canada pushing yields higher in the next few quarters remains quite low. I remain cautious on high yield given the extended valuations. Still, I continue to favour high quality, actively managed bond funds that offer higher yields and shorter durations than the traditional indices.