Over the past few days we have witnessed a correction on the main global stock indexes. Such corrections are not unusual and it is actually quite common to have a correction during the year. The markets cannot climb indefinitely and must undergo a price adjustment from time to time. The years 2016 and 2017 saw exceptionally low volatility and were correction-free.
What caused this correction?
A closer look at the correction of the past few days shows that it hasn’t been so negative. In fact, it was fueled by a sudden rise in market volatility. The VIX index – which measures this data – made a big jump 50 level on February 5, before falling back to 22 on February 6. This increase was essentially due to an overreaction to fears related to inflation and interest rates:
- There was upward pressure on long-term bond yields.
- S. wages rose 2.9%.
- The new U.S. tax policy is giving rise to fears of government debt.
In addition, certain very special financial products, which exploited the low market volatility, experienced a lot of difficulty. Holders of these instruments had to make hedge trades, which ultimately exacerbated the market decline.
On the other hand, fundamentals remain extremely robust:
- Corporate revenues continue to rise.
- The correction reduced the market’s price/earnings ratio to a more attractive level, about one multiple point lower.
- Credit spreads remained unchanged.
Moreover, there are no signs of an imminent recession.
A simple correction
On February 7, 10-year bond yields had fallen from 2.87% to 2.78%. Analysts now believe there is an 80% chance that the Fed will raise its rates in March, whereas before the correction they put the odds at 100%. So the rate fears seem to be dissipating and we do not see in these events the beginning of a bear market, but simply a correction.
The current decline is therefore healthy for the markets, even if the volatility continues. It has created many good buying opportunities, which we intend to take advantage of.
Our investment philosophy sets us apart
Although the past week was very challenging for investors, it also points up the robustness of our investment process. During the week of January 12 to February 6, 2018, 12 of our 13 funds outperformed the median in their respective category. We managed to beat the benchmark index of each of our mandates by 0.89 % during this turbulent period.
This performance is especially remarkable as it enabled us to set ourselves apart from our competitors by placing us in the 38th percentile (38 best funds out of 100 in a category) or better. In fact, seven of our funds even ranked among the top 25% in their respective category.
If you have any questions about the current situation which you would like to discuss, contact your wealth management advisor.
Stéphane Girard, CIM®, F. Pl.
Product Manager, Professionals’ Financial
Sources : Bloomberg, Yardeni.
The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Advisor.
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