Market Insights

Market Update. As the market deflects, then corrects, WealthBar protects

November 15, 2018


Market Update. As the market deflects, then corrects, WealthBar protects

Market Insights

Rolling with the punches is part of smart investing. Maybe you remember the wise words of boxing film legend Rocky Balboa: “It ain’t about how hard you hit. It’s about how hard you can get hit and keep moving forward… That’s how winning is done!”

That’s just as true when you’re getting hit in the portfolio. As the market took a dip in late October, investors who got out just locked in their losses! But those who hunkered down in late October and waited a week saw the S&P 500 go back up about 100 points by Nov. 1.

For WealthBar investors, there was even better news! While the market (S&P 500) overall saw a temporary drop of -6.90% in October, our diversification strategy helped keep losses to a minimum. For instance, our Private Balanced Fund dipped just -1.50%. This strategy has enabled us to bounce back faster.

What caused all this volatility in the first place? A few factors. US midterm electionsChina-US tariff negotiations. Tech stock earnings were good, but apparently not good enough.

But there was still plenty of good news, with the economy looking good overall. The US virtually has a job for anyone who wants one. Meanwhile, in Canada, we’ve got a whole new legal marijuana industry to take our economy higher.

How are these factors and more impacting your portfolio? See our performance and additional insights below.

ETF Portfolios

ETF Safety Portfolio was down -1.88% in October. It’s still up 0.61% for the past year.

This portfolio’s Oct performance was down the least out of the ETF portfolios. Most of the portfolio’s performance was attributed to the fixed income ETF’s, which helped offset the overall equity market decline. The higher weightings in short duration bonds also moderated any losses from the volatile equity markets.

ETF Conservative Portfolio was down -2.68% in October. It’s still up 1.46% for the past year.

This portfolio contains a higher weighting in ZHY, the High Yield US Corporate Bond ETF. This ETF performed better than the overall equities market while still maintaining some exposure to capture the upside. As a result, the portfolio had a lower return than the ETF Safety Portfolio.

ETF Balanced Portfolio was down -3.47% in October. It’s still up 2.06% for the past year.

This portfolio had further increased exposures to Real Estate and US equities, which resulted in a lower returns compared to the Conservative Portfolio. The increased exposures in HXS, the S&P 500 ETF, put a drag on the overall portfolio’s returns. At the same time, there is still a significant portion of the portfolio dedicated to diversification and risk reduction.

ETF Growth Portfolio was down -3.90% in October. It’s still up 2.41% for the past year.

The majority of this portfolio’s lower performance can be attributed to the greater exposure to HXS (S&P 500 ETF). The total return from HXS and other equity focused ETF trimmed back the gains for the year. Since this ETF isn’t hedged, it also captured the upside from the strengthening USD, resulting in outperformance of the actual S&P 500 index.

ETF Aggressive Portfolio was down -4.34% in October. It’s still up 2.94% for the past year.

This portfolio having the highest weighting in HXS (US equities). As a result, it had the lowest monthly return across all of our portfolios. With that being said, selecting the unhedged version of the S&P 500 ETF allowed us to minimize losses. The high yield bond and the laddered preferred share ETFs provided further diversification.

Private Investment Portfolio

Safety Private Portfolio was down -0.78% in October. It’s still up 2.73% for the past year.

The mortgage funds provided some income and positive returns to this portfolio. They also continued to reduce the volatility of the portfolio. The additional diversification to asset classes in the NWM Core Fund such as mortgages, commodities, real estate and private equity contributed to the overall negative returns but remained a key component at mitigating risk.

Balanced Private Portfolio was down -1.50% in October. It’s still up 3.57% for the past year.

The position in the NWM Core Fund gave us a lower performance, but the asset classes such as mortgages, commodities, real estate and private equity within this fund provide great diversification and remained a key component at mitigating risk.

Aggressive Private Portfolio was down -0.95% in October. It’s still up 3.96% for the past year.

The extra exposure in the NWM Real Estate Fund generated some positive returns this month which led to a higher overall performance for this portfolio over the Balanced Private portfolios. The core balanced position still provided additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk.

Market movers, at a glance

Now we can take a closer look at some of the market movers in October-November. Let’s get started!

Stock market gets down, but we know how to dance with volatility

Diversification, plus access to non-traditional investment asset classes. That’s how we manage risk across all of our portfolios. That strategy paid off big-time in recent weeks.

While the S&P went down -6.90% in October, our Balanced Private Investment Portfolio dropped just -1.50%. Our most Aggressive ETF Portfolio fell just -4.34%. Now, nobody likes it when their portfolio takes a dip, but I think we can all agree that a dip is better than a fall. And right after the market fell, we were positioned to rebalance to purchase assets at a discount, which should provide even better returns when the market swings up again.

US politics gets the headlines, but the US economy is where the action is

Two things can be true at the same time: Stocks are volatile (see above). Second, the US economy is still charging forward. It grew 3.5 percent in the last quarter. Their economy added 250,000 jobs last month, bringing unemployment to a historic low. Wages grew too, by 3.1 percent — reversing a persistent decline. Housing starts remain at a high level, showcasing abundant confidence in the future. And while stocks have been jittery, tech leaders like Facebook and Apple have seen their shares rise back up lately. Google, Tesla and Netflix all beat earnings expectations.

For those trying to keep their eye on the ball, the big political stories lately were a distraction. US midterm elections dominated headlines, with some investors worrying that a “blue wave” taking both electoral houses might reverse some of the economic gains of the Trump era. But historically, stocks have risen every year after mid-terms, whoever gets voted in. And in these early days, stocks bounced up after Democrats won the House and Republicans built up their lead in the Senate. Divided branches of government will probably be good for equity markets here and abroad.

As predicted, the market volatility subsided after the midterm elections were completed, and our S&P 500 ETF, HXS saw a 1.33% bounce back as of Nov 1st to Nov 12th.

For markets, the bigger political divide is Red, White and Blue vs Red

For Canadian investors and the global economy, the political event with more potential to rock the boat is the US-China tariff dispute. A few months back, US President Donald Trump was widely mocked for saying trade wars are “good and easy to win.” But was he right? The US is roaring ahead these days despite some considerable pain to American firms. Meanwhile, China’s leaders publicly worry about the economic hit they are taking to their manufacturing and services sector. Exports have slumped since the US put 10 per cent tariffs on US$200 billion worth of Chinese goods in the fall.

Perhaps the US and China will come to some accord, as NAFTA’s breakup led to the USMCA deal. For now, the US is turning up the heat. Though US Treasury staff have concluded that China is not a currency manipulator, they are continuing to put China on a monitoring list.

The trade talks are still ongoing. However, the uncertainty is weighing on the markets. It is causing our ETF models to be more volatile. Although our equity ETF’s have had negative returns due to these headlines, our choice to invest in the unhedged versions of the S&P 500 and International Equities ETFs has paid off. The S&P 500 was down 6.90% vs. our ETF being down only 5.08% in October. The International developed market index was down 7.87% vs. our ETF being down only 6.73% in October.

Canada growing strong, enjoys boost from marijuana legalization, but oil price drips down

There are big benefits to living just north of the American engine of the global economy. Reflecting our own hot economy, the Bank of Canada raised interest rates in late October to 1.75 percent. The S&P/TSX Composite index is back up again after some recent volatility, buoyed by the US midterm vote, marijuana stocks and gains in the tech sector. The initial drop in share prices on the first day of legalization didn’t leave marijuana stock investors with a happy buzz, but the sector is generally up from where it was a few weeks ago. This industry may represent over $30 billion in assets over the next three years, so certainly it could be part of investors’ diversification strategy.

Some elements to watch: Oil declined from $75 per barrel in October by about 10 percent, which is hurting domestic energy producers. As well, REITS declined temporarily after about six months of steady growth in value. As well, the carbon tax that the Liberal government wants to implement is seeing fierce resistance in the provinces. This makes it unclear how it will play out. For a petro-economy, a carbon tax is bound to be contentious. (For those eco-friendly investors who want to invest their values, we’d remind you of our Cleantech add-on, letting Canadians invest their money in the green technology sector).

With the interest rates increasing and oil prices falling, Canadian ETF HXT, saw a decline of 5.73%. Although this may be a large drop within the month of October, we ensured this position did not play a big role in our portfolios. We try to give Canadian equities an allocation that accurately represents it’s weight in the broader global markets, this may result in small losses versus other portfolio models out there.

Market update. Conclusion

The market has been more volatile lately, showing off the value of a diversified investment strategy that takes advantage of a wider range of asset classes. Politics got a lot of attention this month, but investors can stay focused on the economic fundamentals. Our balanced approach has helped our investors to remain positioned for long-term growth.

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