Martin Pelletier: In uncertain times, portfolios built on quality, balance, and adaptability will be best positioned to weather the storm
As the U.S. equity market continues to exhibit tremendous volatility, investor nerves are increasingly frayed. The persistent sell-off and repeated failure of the market to find a solid bottom are raising legitimate concerns about whether further downside risk lies ahead. Each failed rally breeds more uncertainty, contributing to a cycle of hesitation and caution among portfolio managers and retail investors alike.
A notable technical development adding to this unease is the recent emergence of the so-called “death cross” across a swath of major indices and leading U.S. companies. This pattern, where the 50-day moving average crosses below the 200-day moving average, has manifested in the S&P 500 and Russell 2000, and prominent stocks including Nvidia Corp., Tesla Inc., The Walt Disney Co., Bank of America Corp., and Delta Air Lines Inc. Historically, the death cross has been viewed as a bearish signal, often preceding periods of continued weakness.
However, while this pattern can indicate a shift toward a longer-term downtrend, it is not always conclusive. The current macroeconomic environment is layered with variables that could still provide upside catalysts. Notably, any resolution or favourable shift in trade dynamics, particularly relating to U.S. President Donald Trump’s tariffs, could prompt a reassessment of risk sentiment and offer relief to markets.
Adding to the mixed picture is the Relative Strength Index (RSI), which now shows oversold conditions across many equities. While this has historically been a precursor to potential rebounds, it is not a guarantee. In fact, markets in oversold territory can remain that way longer than expected, especially when accompanied by broader macro concerns or technical deterioration.
Historical market episodes offer valuable context.
- S&P 500 during the 2008 financial crisis experienced a sharp 30–40 per cent drop after forming a death cross and hitting oversold RSI levels. The bottoming process took between six to twelve months, marked by intense volatility and policy intervention.
- Apple Inc. in 2013 declined about 20–25 per cent with sentiment eventually reversing on the back of new product innovation and regained investor confidence, leading to recovery within three to six months.
- Russell 2000 in 2023 saw a 15–20 per cent decline before stabilizing, highlighting the impact of economic resilience and targeted sector strength in shaping outcomes. The index took roughly four to eight months to reach a sustainable floor.
- Nvidia and Tesla in 2022 represent more recent cautionary tales, with both experiencing steep drawdowns — 47 per cent and 54 per cent, respectively — before bottoming out early in 2023. Their eventual rebounds were driven by improved earnings visibility and shifting market narratives.
Despite these patterns, a notable divergence is emerging between institutional caution and retail optimism. In the week ending April 18, leveraged long exchange-traded funds (ETFs) recorded net inflows of US$6.6 billion, a historic high. Most striking was the US$2.3 billion surge into the triple-leveraged Nasdaq 100 ETF, indicating aggressive dip-buying behaviour from retail investors.
While this speaks to a desire to capitalize on perceived bargains in sectors of the market such as U.S. tech, such actions often precede further volatility when done en masse. Rather than chasing yesterday’s leaders, investors might consider using these bear market rallies as opportunities to strategically rebalance should this prove to be a large structural shift taking place.
Here are some capital allocation considerations.
- Bonds, traditionally viewed as safe havens during downturns, remain challenged by persistently high U.S. yields, reflecting concerns about the government’s expanding fiscal footprint. A falling dollar adds to the complexity, encouraging capital repatriation from global investors.
- Structured notes are drawing increased interest, particularly for registered accounts where tax efficiency is a concern. These instruments allow investors to participate in market upside while mitigating drawdown risk, making them very appealing in volatile environments.
- Global diversification is another viable path. ETFs such as iShares MSCI Japan Value and iShares MSCI EAFE offer exposure to markets that are less influenced by America-centric economic and political developments. These regions may present more favorable valuations and policy backdrops.
- Domestic resilience offers yet another layer of defense, such as Canadian dividend companies. For example, we at TriVest Wealth Counsel are quite pleased with our position in Outcome Metric Asset Management’s Canadian Equity Income Fund that has gained 3.5 per cent year-to-date as of April 11, driven by holdings such as Alamos Gold Inc., Wheaton Precious Metals Corp., Franco-Nevada Corp., Finning International Inc., Waste Connections Inc., and Metro Inc. — companies with defensible margins and sectoral strength.
- Energy sector watch: The oil and gas industry is currently at a political crossroads in Canada. A shift in the federal government’s position could potentially eliminate significant regulatory headwinds. Additionally, if U.S. shale output peaks sooner than anticipated, Canadian producers, known for their cost efficiency and long-life assets, may see significant renewed investor interest.
In summary, while investors are betting on a return to what we’ve witnessed in the past two years via U.S. markets leading the charge, the prevalence of death crosses and oversold indicators underscores the current fragility in markets and that downside tail risks still persist. Much will depend on how macroeconomic and geopolitical variables evolve, particularly in the weeks and months ahead.
The key takeaway is to remain vigilant, flexible and prepared. Rather than overcommitting to short-term narratives or lagging signals, a measured approach that blends technical awareness with macro insight and global diversification will prove more durable. History has shown that periods of heightened volatility often give way to strategic opportunities — for those with the foresight and discipline to seize them.
In uncertain times, portfolios built on quality, balance, and adaptability will be best positioned to weather the storm and capitalize on the eventual recovery.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.
