Monetary Policy & the Markets
The US Federal Reserve continues their massive quantitative easing (QE) campaign. Despite slowing GDP and corporate earnings growth rates, global markets have continued to move higher. This is similar to last year, when stocks climbed a “wall of worry” and posted great returns. The main catalyst appears to be ongoing monetary policy support, as other developed nation central banks have joined the US Federal Reserve in launching quantitative easing (QE) campaigns, while still more maintain ultra-low interest rate policies. All of this is forcing the hand of investors in search of better returns, who find themselves pushed out the risk spectrum, as bond yields remain near record lows.
The graph below shows just how well various global equity indices have performed thus far in 2013. *Note: returns are denominated in USD as of May 23, 2013. It seems all that ‘newly-minted’ QE money has not yet found its way into the commodity market, but with each passing month there is more currency floating around in the capital markets. Sooner or later, equities will become saturated and the surplus money should start to flow into commodities.
While numerous investments that span different regions and asset classes have come down of late, this is no reason to capitulate and head for the sidelines. Market pullbacks, particularly after a period of pronounced strength, are nothing new. It is a reality of investing, at least until speculators and those with short time horizons stop trying to time the markets, and not necessarily an indication of any breakdown in fundamentals or a forthcoming period of pronounced weakness. In fact, the S&P 500 has gone more than 100 days since its last 5% retreat, which is the longest stretch since February 2007.
A rather famous investor by the name of Peter Lynch once said, “The key to making money in stocks is not to get scared out of them.” In truth, you cannot make money on any investment if you abandon it, whether stocks, bonds or commodities. At T.E. Wealth, we have always advocated that our clients maintain a diversified portfolio with exposure to various asset classes, regions and styles because markets move through cycles and nothing can go up forever. It’s just not possible to accurately predict what will outperform and when. And, you need to know both in order to successfully time the markets. This is compounded by the fact that you’ll then need to figure out what should take a recent winner’s place! Without the benefit of hindsight, this simply cannot be done…at least not consistently.
Incidentally, those of you who have a portfolio at T.E. might be wondering about commodities, specifically, the lack of investment vehicles you own that target this segment of the market. We would like to point out that the Canadian marketplace has an abundance of exposure to commodities without needing to take on dedicated exposure. In fact, the energy and materials sectors account for more than 40% of the S&P/TSX Composite Index. This quirk of the Canadian investment landscape led us to conclude that additional exposure is simply not necessary.
Should you have any questions about your portfolio please contact your financial consultant or Investment counsellor.
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