Transcript: Just Breathe — Market Volatility is Normal


Transcript: Just Breathe – Market Volatility is Normal

[Craig Jerusalim, Portfolio Manager, Canadian Equities, CIBC Asset Management]

The volatility that we are seeing today is by no means unprecedented. If you look back over the 100-year history of the S&P 500, we've had about 14, 20 percent drawdowns in the market and each time that happens, volatility spikes up, and we know for a fact that there weren't quant funds or ETFs back in the 1930s or 40s but it's a similar it's a similar pattern of volatility that was experienced back then, and it largely has to do with investor psychology. When the market is moving higher, it's always that battle between fear and greed. So when the market is moving higher investors become greedy and have that fear of missing out. So they decide to put money into the market but there's no specific trigger. They could put money in today or wait until next week. And slowly as the market goes up, they continue to put more and more money into the market. However when there is a correction and the market drops suddenly, that's when the fear gauge kicks in and investors call up their broker or go online and sell and hit the panic button. So the market goes up like an escalator and then down like an elevator.

[Dangers of market timing]

I would argue that this is the wrong time to be market timing. According to the statistics that we've looked at, for the TSX over the last 20 years, if you are out of the market for the top 20 days, you would have wiped up your entire returns over that time period. So it really doesn't pay to market time. Over the long term, markets continue to go up, and these periods of heightened volatility, if anything, are opportunities to continue to high-grade portfolios, find companies that are the right price and have the right fundamentals for growth over the long term. And that's one of the biggest differences from today's market versus some of the volatility and downdrafts that we saw in 2007 and 2008. Back then, both earnings were falling and price was falling. Whereas today, yes, prices are falling as well but earnings continue to go up because of the positive fundamentals. We're seeing tax reform in the U.S., strong growth, synchronized global growth amongst the largest economies of the world.

[More reasonable equity valuations]

So the volatility today has really just been a price correction. Investors got overly ambitious and were pushed the market to extreme valuation levels in December and January and now we're just giving some of that back. But because the earnings number continues to grow up, it's just deciding how much you want to pay for those earnings today. Investors decided they didn't want to pay 21 times earnings and said they are likely willing to pay 17 or 18 given the fact that interest rates are still low and accommodative, even though there is some concern that rising interest rates will do to valuations over the medium term.

[How to defend your portfolio in volatile times?]

One of the best defences against this increased level of volatility is to simply buy good companies, companies that are growing over time, that have strong fundamentals, that have competitive advantages and strong management teams, companies that are going to grow into their earnings over time. So whether or not you pay a little bit more today or a little bit less, what matters is that the company's valuation is going to grow over time and reward shareholders over the long term.

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