Recent volatility reveals well-functioning market

“I’m not worried about these kinds of 10% pullbacks,” he said. “They are actually a good sign that the market is functioning well.”

Franz said there’s a tendency to read too much into small corrections, or to review history to determine a rationale for current realities. But general principles rarely capture the full picture, he said, and comparisons to previous decades often fail.

“There’s a lot of commentary out there about how this is like the ’60s because of big government projects. Or how this is like the ’70s because of inflation. Or how this is like the ’90s because of technology. At the end of the day, it’s such a unique time right now that it’s not like any of these at all,” he said. “We are in a fundamentally different economic environment than we have been in the past.”

Franz said the global pandemic of 2020 — with its supply chain disruptions, stimulus spending and inflation — caused economic reverberations, and investors should take one lesson from the most recent bout of volatility: stay invested and diversify.

“That’s something we preach a lot,” he said. “Having an all-weather portfolio that’s well diversified [and] has exposure to different outcomes is very important. That’s something investors should really take to heart.”

Trying to take advantage of corrections is a complicated and difficult game.

“When you try to time these markets, you lose sight of the long term,” he said.

With the economy still in positive territory and corporate fundamentals sound, Franz said earnings and markets are likely to remain healthy for the balance of this year and into the next. Expected interest rate cuts will only enhance market liquidity and function as a “good setup” for continued market performance.

The recent selloff raised fears of an imminent recession — fears that emerged in 2022 when the yield curve first inverted but were quieted subsequently by strong market returns.

“As we know from history, the yield curve has this uncanny ability to predict recessions,” he said. “But we’ve been living with this fear for two years now. I think things are a little different.”

For one thing, GDP growth in 2023 was 3.1%, which he described as “a pretty darn great GDP outcome” for the U.S. On top of that, the strong labour market and new work-from-home norms “really changed the dynamic of the U.S. economy.”

He pointed out that about half of current investors have lived through the great financial crisis of 2009, which was a dramatic and deep 18-month recession. The other half of the market has only seen the Covid recession, which is the shortest recession on record.

“We’re really not even used to what a normal cycle feels like anymore,” he said, adding that he doesn’t see signs of a recession so much as a potential slowing from 3% GDP growth to 2.5% — still a strong number.

“If I’m right about where we are with interest rates, that we’ve reached the peak and we’re heading lower … then interest-rate-sensitive sectors like housing and autos are two areas that could actually do quite well,” he said.

Other sectors that could benefit from lower rates are banks, which have faced headwinds over the past couple of years, and the commercial real estate market, which was stunted by new work-from-anywhere norms.

“When I look at the economic picture — at least in the U.S. — I’m less seeing signs of an imminent contraction or a recession. I’m more seeing signs of slowing economic activity, which, to be honest, would be kind of normal, relative to where we have been historically,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.