After many months of relative calm that followed several very choppy weeks in late January and early February, on October 10 the US stock market dropped 3.3% in just one day.
Several explanations for the quick slide have been put forth, including renewed concern about a US/China trade war and the impact of rising bond yields. Both issues have been on the radar for many months, not just one day, and so do not strike us as being very satisfactory explanations.
This is not to say that investors weren’t concerned about something. Whether that concern was warranted, however, is another matter. Despite ongoing interest rate increases by North American central banks over the past two years, both the US and Canadian economies are in fine form. Moreover, at the first sign of economic weakness, central banks can easily put their interest rate hikes on hold or even reverse them. Stock valuations aren’t as cheap as in the immediate wake of the 2008 global financial crisis, but neither are they as heady as during the late 1990’s tech/telecom bubble. Neither economic fundamentals nor stock market valuations suggest that we’re on the verge of anything extreme.
Instead, we believe that today’s share price decline was mainly a manifestation of human psychology. Stock prices change continually and reflect the last agreed-upon price between buyers and sellers, who in turn are subject to a wide range of emotions. When those emotions become extreme, for any reason, they result in choppy stock price movements in either direction. A recent example was the heightened stock price choppiness (“volatility”) beginning late January, shown in the chart below. Seven months later, it’s clear that no recession was imminent – but that didn’t prevent share prices from showing a couple months’ worth of jitters, before ultimately settling down.
As we’ve said many times in the past, trying to time financial markets’ short-term gyrations is a mug’s game that more often than not results in losses, not gains. Instead, the key to running the investment marathon is first to recognize that it’s a marathon that lasts several decades, not a series of sprints, and secondly to commensurately maintain one’s long-term investment plan through the marathon’s inevitable peaks and valleys.
Chief Investment Officer, ATB Investment Management Inc.
This document has been prepared by ATB Wealth. ATB Investment Management Inc., ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund) and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth. ATB Financial is a registered trade name/trademark of Alberta Treasury Branches.
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