Market Updates from 5i Research - August 13, 2019

Given the fear-based headlines regarding recessions and market volatility, it might be hard to believe that the TSX is down less than a quarter of a percent and that the S&P 500 is up 0.7% (both of which are close to all-time highs) since we last sent out this update. We seem to be stuck in the continuous loop of the market moving on the whims of trade-war headlines. This back and forth see-saw of tariff news has markets and companies on edge and certainly might be the thing to tip the economy into recession. But it might not be as well. If anything keeps us optimistic on the markets (aside from a pretty solid quarter from companies reporting so far and many economic fundamentals that remain strong) it is that no one is happy about the markets and everyone seems to think a recession is just around the corner. This brings us to an important axiom we think can often be forgotten and might apply to the situation we are in today: The economy is not the market. Tariffs from a trade war might knock the economy into a recession but this does not mean that markets will crater 20% on the news. If markets are already pricing in that recession (and we think this has to be the case to some degree given fears), the market reaction could actually be quite muted. In some cases, if any recession is milder than markets expected, you could potentially see markets go up on news of a 'mild recession'. We do not want to get too in the weeds here except to make the point that while no one wants an economic downturn, just because the economy 'goes down', does not mean that stocks will necessarily go down.

As always though, investing in the context of the total portfolio and one's asset allocation is important. If the recent volatility makes an investor lose sleep at night, this might mean there is too high of an allocation to equity. Balancing between stocks and bonds can remove a lot of stress from the process of investing and also help protect an investor if or when a bear market appears. In fact, for those with a longer timeframe, any downturn might be welcomed as funds from cash-like securities can then be reinvested into stocks at better prices. The point here is that investors should be less worried about timing the next recession or downturn and more concerned with ensuring that their portfolio is allocated in a way that makes sense for them and where a recession 'won't matter' because they are positioned properly.  Finally, if you do not know where to start with a process like this, we do believe that Portfolio Analytics is a great tool to help an investor understand and manage the construction and tracking of their portfolio.