Half Full or Half Empty?
Catalyst Wealth Partners Fall 2024 Newsletter
How do you view the glass — half full or half empty? This question aptly captures the dual nature of sentiment today. On one hand, our standard of living is among the highest in history, fuelled by technological advances, improved quality of life, substantial and growing wealth and increased life expectancy. On the other hand, this progress is overshadowed by rising costs of living, heavy debt burdens, declining productivity and ongoing geopolitical tensions.
Economies similarly continue to navigate between two contrasting states, described by some as a “delayed landing.” Despite predictions for a recession since 2022, the economic news has largely persisted in a space that could be viewed as either half full or half empty.
Given this context, it is perhaps unsurprising that markets remained unusually calm during the first half of 2024. In July, the CBOE Volatility Index (VIX) lingered at lows not seen since November 2019, and the S&P 500 experienced its longest daily stretch without a two-percent drop since 2007.1 Yet, this tranquility was interrupted by the Bank of Japan’s unexpected interest rate hike. A rapidly appreciating Japanese yen and the unwinding of a risky leveraged strategy known as the “carry trade” prompted the Nikkei to its worst day since Black Monday in 1987. This marked the return of volatility for North American markets, with the VIX spiking to the third-highest level since its inception, showing just how quickly sentiment can shift.
While a sense of uncertainty reemerged, the near-term outlook hadn’t dramatically changed: global inflation continues to fall, labour markets, while slowing, remain stable on an absolute basis, corporate earnings have been robust and financial conditions remain relatively loose.
In the preceding calm, we may have forgotten that volatility is a common feature of the markets — often indiscriminate in nature. Over the past 40 years of the S&P/TSX Composite Index, a 5 percent downturn is pretty much guaranteed in most years. A double-digit drawdown occurs every 1.8 years and a drawdown of more than 15 percent happens one-third of the time. Even in years where the S&P/TSX Composite Index has posted strong annual performance, significant intra-year price drawdowns are common. The stock market goes down even when it goes up. The average intra-year drawdown over 40 years is -15 percent, despite an average annual return of more than 6 percent (see page 3).
During these times, it’s important not to let short-term fluctuations disrupt long-term financial plans. Worth repeating: One of the most important variables for how you’ll do as an investor is how long you can stay invested. The inevitable market swings will put investors to the test, but this is the price of admission for the longer-term gains that equity markets offer.
Consider the merits of having a solid investment plan — and sticking to it.
