Investing During a Bear Market Correction

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Craig Jerusalim

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Craig Jerusalim, senior portfolio manager at CIBC Asset Management.

Earlier this quarter, U.S. equities hit that proverbial bear market level, seeing the S&P 500 drop 20% from their post Covid highs. At the same time, valuations looked quite lofty relative to historical levels, and rising interest rates, rampant inflation, geopolitical risks, and slowing growth create an uncertain period for equity investors to say the least.

What should an investor do during a bear market correction? First of all, 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. Next, look to high grade portfolios by moving away from unprofitable and expensive growth into high quality profitable companies with resilient business models and competitive positions that allow them to pass on these higher costs. But most of all, avoid market timing, because no one has shown a great ability to market time. 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. Remember, by missing out on just the top 20 days in a decade, you can completely wipe out total returns.

A popular strategy that I’m currently recommending to help smooth out volatility and help investors focus on the long term is dividend income and dividend growth strategies. We just went through a 10-year period where equities effectively tripled. In that environment dividends don’t contribute much to total returns. The prior 10 year period, however, 2000 to 2010, saw equities essentially move sideways, in which case 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.

The dividend yield on the TSX Dividend Index is over 3.3% and is still well above the government 10-year, Canada’s benchmark rate. And unlike fixed income, equities continue to grow distributions in line with earnings. Cyclical sectors like energy and materials have prioritized return on investments and shareholder returns such as dividend increases and buybacks rather than M&A and major investments. Banks and insurance companies are experiencing margin expansion from rising interest rates and are growing dividends accordingly. Balance sheets in many sectors were repaired during Covid, leaving many companies poised to continue raising distributions.

All to say there is a lot of optimism in the sustainability and growth of dividends coming from many of the largest companies in Canada. While stocks will do what stocks do, the comfort, sustainability and reasonable expectations for dividend growth, giving investors exactly what is needed in this current market.