Investing during a bear market correction

Rising interest rates, rampant inflation, slowing growth and ongoing geopolitical risks have created an uncertain period for investors.

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Earlier this quarter, U.S. equities hit bear market territory, with the S&P 500 plummeting 20% from its post-Covid highs, noted Craig Jerusalim, senior portfolio manager of Canadian equities with CIBC Asset Management, in an interview earlier this month.

On Monday, amid concern about inflation ahead of the Federal Reserve’s next rate announcement this week, the index was again in bear territory.

In a bear market correction, investors can do three things, Jerusalim said.

First, don’t panic. “Just look at the hundred-year history of the market to gain comfort that one day we’ll ultimately get back to all-time highs,” he said. 

Next, investors should shift their focus from unprofitable and expensive growth into high-quality, profitable companies with resilient business models and competitive positions that allow them to pass on higher costs, he said.

Lastly, avoid market timing. 

“No one has shown a great ability to market time,” Jerusalim said. “And, by being out of the market, one tends to miss those best days early on in a recovery, when skepticism is greatest and upward moves are most violent.”

Instead, Jerusalim recommends dividend income and dividend growth strategies to smooth out volatility and help investors focus on the long term. 

Over the past 10 years, the U.S. stock market effectively tripled, he noted. In such a rising-price environment, dividends don’t contribute much to total returns. However, in the previous 10-year period from 2000 to 2010, as equities “moved sideways,” he said, dividends made up the majority of shareholder returns.

“If markets remain volatile, then dividends will once again matter, and could — and should — keep clients fully invested and able to benefit once conditions eventually improve,” he said. 

Jerusalim also said that, unlike fixed income, equities continue to grow distributions in line with earnings. 

For example, cyclical sectors, like energy and materials, have prioritized return on investment including shareholder returns such as dividend increases and share buybacks, instead of mergers and acquisitions and major investments. 

Further, banks and insurance companies are experiencing margin expansion from rising interest rates, he said, and are growing dividends accordingly. And many sectors saw a repair in their balance sheets during the pandemic, “leaving many companies poised to continue raising distributions,” Jerusalim said. 

Overall, the outlook is optimistic for the sustainability and growth of dividends from Canada’s largest companies.

“While stocks will do what stocks do, the comfort, sustainability and reasonable expectations for dividend growth give investors exactly what is needed in this current market,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.