Stay the course amid market volatility

In the face of ongoing market uncertainty, investors should stick to their long-term strategy and not be swayed by short-term market fluctuations, said CIBC Asset Management’s David Wong.

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“Investors can balance stability and growth in today’s economic environment in rather interesting ways,” said Wong, chief investment officer, managing director and head, total investment solutions, with CIBC Asset Management.

Investors were in a holding pattern at the beginning of 2023, he said, waiting for an economic slowdown and expecting the markets to respond accordingly. 

Ten months later, that pattern remains, and Wong said there is no need to abandon a carefully crafted investment strategy. “Don’t try to outguess the situation,” he said.

With interest rates at levels not seen since the end of 2007, Wong said investors should consider taking advantage of higher yields.

“It’s hard not to be attracted to the yields that are available in the market today,” he said.

Bond yields in particular have increased, with 10-year bond yields exceeding 4% for risk-free federal bonds in both the U.S. and Canada.

“The pain that’s been felt in the bond market so far this year is likely going to be in the rear view as the hiking cycle nears its end,” he said.

Despite short-term volatility, he said bonds can offer attractive long-term returns, making them an appealing option for investors.

Rates remaining high but stable would likely lead to favourable bond returns with lower volatility while also resulting in downward pressure on equities.

“In that environment, having a focus on the bonds of good companies with the ability to withstand higher rates should provide really solid returns,” he said.

Similarly, for equities Wong recommends companies with good business models that can withstand short-term volatility in any sort of repricing.

If rates continue to increase, Wong said, instruments like floating-rate bank loans could continue to benefit.

“Having diversification inside bond portfolios is a really good idea to have something working in any extreme outcome, whether rates are going higher or lower,” he said.

If central banks respond to market weakness with looser monetary policy, as they have done historically, it could benefit risk assets, Wong said. However, inflation remains a top concern.

Wong said the Bank of Canada and the U.S. Federal Reserve would need to ensure they have inflation under control before adopting such a strategy. As a result, he recommends investors prepare for a variety of scenarios by maintaining a diversified portfolio.

That said, according to Wong, assets positioned further along the risk curve, such as global small-cap stocks, emerging markets and growth equities, could thrive if interest rates do move lower. Bonds could also experience upward price adjustments in the short term.

Conversely, Wong said an asset to avoid in advance of such scenario would be cash, which offers limited opportunities for growth, resulting in opportunity costs for investors with long-term horizons.

Regardless, he said it comes back to diversification. “Prediction is hard. Preparation is relatively easier,” he said.

True diversification involves including assets that may make investors uncomfortable, he said. However, Wong noted the success of institutional investors who have embraced private markets, where opportunities exist to access higher yields through private credit.

In terms of risk, Wong warned of the possibility of increased equity market volatility, especially in the event of an economic slowdown. He cautioned against complacency, noting that economic indicators such as mortgage impacts and rising interest rates in Canada could pose challenges to equity markets in the coming years.

Looking ahead to the end of 2023 and early 2024, Wong said while equities have performed well this year, replicating that success might be challenging — especially because the rally in the U.S. market has been concentrated in a select few stocks.

Regardless, he said diversification and a long-term focus will be the key to success.

“Identify an asset mix that will help get you there using the unique opportunities that are available today, and let the power of time and diversification help you prepare rather than predict the markets,” he said.

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