The summer did not see much respite from the volatility that has gripped the financial markets. The bearish commentators continue to evoke fears that the aggressive moves by the central banks in raising interest rates will inevitably push economies into recession. It is therefore not surprising that many of us feel we are already in recession¹ — the current narrative, alongside an increasing cost of living, the higher cost of borrowing and financial market declines, certainly hasn’t helped to support optimism.
While it may be difficult to put a positive spin on today’s situation given the challenges, consider that Canada continues to be in a comparatively favourable position globally. There have been positive disinflationary signals as commodities prices, notably energy, have been moderating, supply chains are being fixed and consumer spending is slowing in certain areas. Canada holds an enviable position as a net exporter of both food and energy due to our vast domestic resources. Will inflation continue to slow? Recent U.S. data has been disappointing, suggesting inflation has been more persistent than expected, and in many other parts of the world it continues to accelerate. Europe has been particularly affected, with inflation surpassing the double-digit mark in many nations and an energy crisis only expected to worsen as the winter months arrive.
As such, the near-term outlook collides with the broader forces of the central banks who have yet to give up their fight against inflation. The lagging effects from the ongoing rate hikes are expected to continue slowing economic growth, which suggests continued volatility for the financial markets over the near term.
We know, however, that the financial markets, like economies, are cyclical and periodic declines will occur on a regular basis. It may also be worth pointing out that the markets and economies don’t always move the same way at the same time. A recent study looked back at recessions in the U.S. since 1945, suggesting that the S&P 500 Index actually rose an average of one percent across all recessionary periods. And, in almost every recession, the markets began their climb well before its end.²
As we navigate through these periods, two elements deserve emphasis: diversification and quality. Spreading assets across different sectors, asset classes, market caps or regions, among others, continues to be a proven way to increase stability and lower risk. Those who consider high quality investments will also worry less about enduring values in uncertain times, secure in the knowledge that any price setbacks should be temporary. Managing risks in these and other ways can help cope with the unavoidable volatility
Downturns and economic challenges of one sort or another are a common occurrence in modern capital markets. Periods of retrenchment have always been followed by new growth, economic expansion and improved equity values. There is little reason to expect otherwise in this cycle. And, markets can change their course even when sentiment may appear at its lowest. Keeping this in mind, having the perseverance to stick to your wealth plan is important. Patience may be one of our greatest allies to see us through this period.
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