Almost two years ago, panic amongst investors was surging on a global scale as the World Health Organization officially declared a pandemic. Equity markets subsequently suffered the third worst decline in history as emotional fears and uncertainty affected rational decision making for many. Today, the pandemic still persists, but the fear factor certainly seems to be greatly reduced and that has translated into a gain of more than 50% in global equity markets since they bottomed on March 23, 2020. While it is easy to draw conclusions with the benefit of hindsight, it would certainly appear that investors overreacted to “bad news“, and those who acted on short-term fears were the ones who likely suffered the most financially.
We have unfortunately entered a new period of uncertainty, this time regarding the forceful invasion of Ukraine by Russia. We cannot begin to express our disappointment and sadness over this conflict, and sincerely hope for a rapid and peaceful end. With respect to our responsibility as fiduciaries of our clients’ assets, we will remain focused on objectivity and adhere to the same investment principles that apply in good times and bad:
1. Nobody can predict the future (especially in the short term)
2. Active management does not add value, but has a high cost
3. You cannot control market direction, but you can control the amount of risk that you take
4. Markets can be irrational in the short term, but not the long term
All of the above points reinforce the message that we sent out to clients on Feb. 24, 2022, which essentially suggests that what is happening in the markets now, is a normal part of inevitable market cycles. Furthermore, there is strong evidence to suggest that long term investing works while speculating on short-term outcomes (or market timing) does not work. Time is your best friend in investing, so if you have sufficient time to invest (i.e., a few years or more), we see no reason why any investor should alter their investment strategy.
So far in 2022, investment returns have been decidedly negative. Through the end of February, the FTSE TMX Bond Universe has declined by 4.1%, the MSCI EAFE Index is down 6.1%, and the S&P 500 has fallen by 7.6%. The “bright spot” has been Canadian equity which only fell by 0.1%. European and emerging market equities have been the most negatively impacted regions since the military conflict began and neither of these asset classes figure prominently in any Justwealth portfolio.
We acknowledge that the conflict in Ukraine has added to the complexity for central banks in containing inflation in the very near term. The Bank of Canada has already raised their key interest rate once this year, and more increases are likely to follow. The US Federal Reserve has taken the unusual measure of “pre-announcing” the news of an increase to their key interest rate in advance of an official statement. The short-term economic pain caused by the war may provide some short-to-mid-term relief as the economic disruption caused by the war can dampen future inflationary pressures. It is rare to hear that perspective in the media from “experts”, however, as commentaries seem only to be concerned about the present – a very short-sighted view in our opinion.
Investment returns may continue to be negative in the short term, just as inflation may worsen before it moderates and eventually reverses course. Or it may not, and we may have already seen the worst. There are so many automatic stabilizers built into economies, governments, and companies, that while it is difficult to predict short-term outcomes, it is significantly easier to predict longer-term outcomes, and we have a positive view for the long term.