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What's Behind the recent Market Pullback?

So, I’m a true believer that just because a client may not be calling in to panic about the markets, doesn’t mean they don’t want to.  This quick email will hopefully calm some of those concerns, otherwise please don’t hesitate to reach out!

 

There have been some great headlines these past few days trying to explain the recent pullback in the markets.  My personal favourite being, “So, this is what happens when the Patriots lose the Super Bowl”!   Many experts are out there providing their own reasons why we’re having a sharp pullback.  Everyone wants a complex sounding reason for why the markets went down.  That said, sometimes it’s as simple as “it is down because it went up A LOT”.

 

Markets have been HOT these last couple years and corrections of 10% or more during a bull market are actually normal.  True story: the market has experienced a drop of some magnitude, every single year over the past 35 years, with the average market drop being 13.8%.  There!  Now you know.

 

 

So what’s behind this latest market pullback?  A few things happened...

 

Bad news?  Quite the opposite in fact.  On Friday, the US released their jobs reports which showed that over 200,000 news jobs were created, unemployment continues to be at all-time lows, and wages continue to rise.  Good right?  Except that with good news like this comes fears of inflation rising.  When inflation rises, the feds tend to rise interest rates.  Interest rates that rise too quickly tend to put a damper on markets.   With me so far?

 

US Pension Funds were forced to rebalance last week after a strong rally in stocks.  Imagine a pension fund with a mandate to hold 60% in stocks and 40% in bonds. Stocks went up 5.7% in January alone, causing portfolios to drift away from their strategic allocation.  So, when one side of the portfolio gets out of balance, it must be rebalanced back.  In the case where the stock portion of the portfolio goes up as much as it did in January, resets have to happen, stocks get sold and re-purchased into bonds.  If you have enough of that going on, markets tend to move as they did.

 

Blame the ROBOTS!  Making things worse, large scale of stock-selling, like the kind I just outlined above, alerted circuit breakers on several mathematic algorithmic trading platforms to SELL!  For many “set-it-and-forget-it” or “do-it-yourself” portfolios, a lot of selling was triggered not because it made sense to sell, but for the simple reason that a pre-determined math calculation was reached, with no regard being given to why a lot of this selling was actually happening.  There was no ‘human’ thought or logic given to it.  You sell because something is wrong with a stock you own, not because the robots tell you to.

 

As a side note, a few Robo-Advisor platforms like WealthSimple and Betterment actually had to shut down yesterday because trading got so out of control, leaving their investors without the ability to get out of the market.

 

Investors panicked!   Then came the average investor who saw what was happening, quickly forgot what it was like to see markets go down, didn’t ask questions, panicked and starting selling.  I’d be willing to bet that many of these investors don’t work with Financial Advisors, who would’ve talked them off the ledge, and safely walked them through market events like these.   Stats show that the selling we just saw was overwhelming from the retail investor, and that institutional investors like Pensions and Mutual Fund Managers, were doing quite the opposite and were buying.

 

With that said, I will leave you with this little piece of genius I read somewhere, “Corrections are like vegetables.  They don’t always taste good, but they can be good for you”.

 

 

Kelly Fagundes is a Senior Financial Advisor at Manulife Securities and can be reached for further comment atkelly.fagundes@manulifesecurities.ca or by phone at 416 259 8222

Call 1-877-676-6686