January Market Matters: Stock market volatility has returned after months of record lows

Global stock markets started their year off by continuing their winning ways. Unfortunately, mid-way through January the Canadian stock market hit the proverbial patch of black ice (oil and winter pun intended), slipped, and fell backwards.

Rising interest rates spur market slip

Two factors played into the January spill, rising interest rates and weakness in the Canadian energy sector.

■ Rising interest rates hit bond prices and the yield-play stocks. These yield-play stocks (think large dividend paying companies) are largely found within telecom and utility sectors, but also include Canadian energy pipeline companies such as Transcanada and Enbridge.

■ Meanwhile, the discount the price for Canadian heavy-oil and light, sweet U.S. crude oil hit four year highs in January. This was an added headwind for Canadian oil exploration and production companies. On average, the discount between West Texas oil prices and Western Canadian Select oil prices has run around $15USD for the past four years. Today that discount is upward of $25USD and driving investors away from the Canadian oil producers.

The Canadian market slide foreshadowed a sharper and more dramatic global equity sell-off in the first week of February. There, the U.S markets (which roared out of the gate in 2018) fell dramatically, erasing January gains. In contrast, the Canadian S&P/TSX Composite did not react as significantly during the most dramatic one-day sell-off on February 5, but our slow start to the year meant that year-to-date results remained deeper into negative territory.

Faster…Stock market volatility returns

Stock market volatility has returned after months of record low volatility (a hallmark of 2017 stock markets). U.S. equity market values increased at break-neck speeds for most of January, running on both fundamentals (like strong corporate earnings) and sentiment. The latter had gotten far ahead of itself as investor’s rose-coloured view point continued to factor in the most optimistic of views regarding politics and central bank expectations, while by and large ignoring alternative outcomes. Consider that the U.S. S&P 500 posted 14 new highs for the month (last closing high on January 26, 2018, at 2,872.87), with 62 new highs posted in 2017 (second only to the 77 new highs posted in 1995). With much of the good news (e.g. U.S. tax reform) already priced into stock values, risks of a correction rose steadily. We expect markets will continue to show higher levels of volatility as sentiment has turned more cautious. While volatility is a measure of both up and down movements, human nature is such that the fast downside moves get an awful lot more attention!

Higher…expectations for Cannabis stocks too high?

According to Investopedia: “A bubble occurs when investors put so much demand on an asset that they drive the price beyond any accurate or rational reflection of its actual worth.” Such has been the case for bitcoin, and now cannabis stocks. The legalization of marijuana for recreational use in Canada is set to take effect this July, but the buzz around the budding cannabis industry is well underway. A number of Canada’s cannabis stocks had risen 200%+ since mid-2017 and into the first few weeks of 2018. The parabolic rise had pushed valuation levels well above those supported by current sales or industry projections for future earnings. We don’t see the recent pull-back of weed stock values as butting out all opportunity for these companies, but it does serve as a good reminder of how quickly and dramatically investor sentiment can light up (and snuff out) market gains.

Stronger…Gold delivers value

With a number of Canadian athletes in pursuit of precious medals/metals, we decided to take a look at how they’ve fared over the last four years. Fittingly, gold metal stands out. Gold has benefitted from rising inflation expectations and most recently for its traditional safe-haven values. Of course, this month’s real treasure will be the inspiration the athletes offer us all!

Dealing with changing markets

Market corrections are uncomfortable, but we caution investors against emotional reactions that take you away from well-balanced and risk aligned investment plans. Markets don’t move in straight lines. The value of sticking to a well-thought-out investment strategy is that it can help you capitalize on market opportunities, even during downturns. It’s an approach that can help you reach your investment goals faster, with higher risk-adjusted returns, and a stronger chance of being more comfortable with the ride along the way.

Copyright 2017 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).

This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.