For the past few months, investors cannot help but have noticed the strength of the U.S. market, which seems to be running on all cylinders. The U.S. economy is growing at more than a 4% clip, corporate earnings are up and the unemployment rate is steadily falling. Job creation has also been growing strongly and, in August, the S&P 500 rose 3.7% and the Nasdaq, 6.3%.
All this good news is prompting many investors to want to review their investment portfolio in order to take full advantage of the current strength of this market. Is this wise? Let’s take a look at the situation.
Going it alone
The first thing that jumps out is that the United States is the only stock market in the world that is up in 2018. All the other global equity markets are in negative territory, including Asia, emerging markets and even Germany. In addition, the drivers of U.S. stock market performance are highly concentrated in the technology sector, with Amazon and Netflix leading the way. This dominance of tech stocks is characteristic of the U.S. market, where it is greater than in all other global markets.
A fragile balance
Although the global economy is expanding, commodity prices―copper, zinc, gold, aluminum―are down sharply. The strength of the U.S. dollar is weakening emerging economies, whose sovereign debt is often in U.S. dollars. What’s more, the increases in the U.S. benchmark rate in 2018 have increased the service of this debt.
We must also recognize that the positive company results and the rise in the U.S. stock indexes are largely due to the tax reform put in place by the Trump administration. This overheating, whose medium- and long-term repercussions are still unknown, could be followed by a cooling off…
Sand in the gears
On the downside, there is the trade war between the United States and China. True to his electoral promises, (America First!), President Trump imposed tariffs on hundreds of billions of dollars of imports from China, which obviously retaliated. This trade war does not augur well: not only is it a threat to world trade, but it also sows doubt among investors and undermines business confidence.
Opposing styles: value and growth
To enable you to better understand the current situation, here is how the stocks in an investment portfolio can be managed:
|With value investing, the manager tries to find companies whose shares are cheap or whose price/earnings ratio is low relative to the market. It is a style that focuses on the long term.||In growth investing, a promising earnings outlook is key. The manager looks for companies with strong earnings and sales growth and for which expectations are high.|
The performance of these different styles is cyclical and depends on various unpredictable factors.
- Currently, growth stocks have the upper hand on the markets.
- At the end of the 2008 financial crisis, the dividend style was very much in favour, and remained so for almost the entire stock market rally, as investors who had been burned sought greater safety and predictability in their investments.
- Over the long term, the returns generated by the different styles are pretty much equal.
Trap or opportunity?
In light of the rally on the U.S. market, you might be tempted to disregard your investment policy or to change your approach if you are with Private Management. Why not benefit from this apparent windfall on the U.S. market?
First, know that we are closely monitoring the current situation and that our portfolio managers always try to seize the best market opportunities through portfolio diversification. The positioning of our funds testifies to this:
- Most of our FDP Portfolios ranked favourably in 2018, particularly our Balanced, FDP Balanced Growth and FDP Balanced Income Portfolios, as well as our FDP Canadian Equity Portfolio.
- The dividend-focused FDP Portfolios have lagged the indexes this year because of current economic conditions that almost exclusively favour stocks that pay little or no dividends and that have a higher risk profile.
Some basic concepts
- Your investor profile reflects your personal and professional objectives, your risk tolerance and your investment horizon. It was established by means of a questionnaire, which you completed with your advisor when you opened your account at the Financial.
- Changes may have occurred in your life which will change your profile. Notify your advisor of these changes.
- Your investment policy is established according to your investor profile. Its purpose is to protect your assets and enable you to achieve your objectives.
- Wanting to change your policy solely to increase your short-term return is a risky move.
- Trying to predict the markets’ reaction is also risky. Don’t forget that your wealth is the result of a lifetime of work.
Maintain your peace of mind
Despite the current U.S. market euphoria, we advise prudence. As managers of your wealth, we recommend that you avoid hasty reactions to market events.
- If you have any doubts or questions, talk about them with your advisor. He is the person best qualified to discuss this subject with you and he has access to the expertise of our entire firm, be it in investments, taxation or financial planning.
We continue to keep a close eye on the markets and to monitor the portfolios. The know-how of our teams is at your disposal, at any time.
|François Landry, CFA
Senior Vice-President and Chief Investment Officer
|François Lavoie, B.A.A., B.A., Adm.A, F. Pl.
Senior Vice-President, Wealth Management