The following is our perspective on market volatility that has happened since October provided by David A. Klassen, Chief Investment Strategist.
The equity market has been volatile since October but now has moved to new lows for the year. This volatility was not unexpected, with asset prices (especially in the U.S.) supported by high earnings expectations and accommodative monetary policy. As a reminder, global central banks had purchased over $18 trillion of securities to support markets over the last 10 years. That positive net purchase globally will turn negative in January 2019, with the U.S. well along in its tightening policy and Europe beginning the same recently.
Economic data (such as housing starts) and surveys that predict future growth have recently turned down and have caused a reaction in the market, mainly because the U.S. had been the only country with resilient economic growth this year. Investors now fret about the combination of higher interest rates (which increase costs to individuals and businesses) and economic slowdown. Geopolitical issues such as the trade war between the U.S. and China, and questions about the U.K. and Brexit, are additional headwinds to market progress.
Although prices have declined, earnings are still expected to grow next year, and a recession is not likely. U.S. equities are now much less extended, given strong earnings growth, and most importantly, international equities are becoming even more attractive. This sets the stage for a potential rebound in 2019.
In the Summer, we had reduced equity exposures in balanced funds (including the Moderate, Aggressive and Beyond Fossil Fuels Balanced Funds) and raised some cash. Equity exposure in balanced funds is at its lowest since 2011. We also have maintained exposure to a number of ‘defensive managers’ who have fared well during this decline.
Even though it was difficult to see the underperformance of emerging markets over the second and third quarters of 2018, it should be noted that U.S. equities have borne the brunt of the recent decline, with emerging markets down only half the degree experienced by U.S. equities. While small consolation, the benefits of diversification sometimes are most apparent during market declines.
While difficult, declines like the one we are going through offer opportunities for our active manager partners to take advantage of better pricing in attractive names. We will keep you apprised as to how we may also lean to attractive asset classes from an asset allocation perspective and will be on the lookout for the possibility that new leadership can emerge in the next rebound. Specifically, we will be watching to see if a weakening dollar will result in allowing international equities to outpace U.S equities over the next few years.
We encourage you to contact us at [email protected] with any further questions you may have.