Market Volatility, Both Necessary and Normal

In light of the recent market volatility, we thought it would be helpful to hear directly from the Portfolio Managers at Fidelity Investments. Their insight can help put current market conditions in perspective. During periods of heightened volatility, the portfolio managers can purchase fundamentally attractive companies at reduced prices.

Please keep in mind:

  • Markets have experienced surges in volatility in the past and have often recovered afterwards.
  • Volatility is a normal part of long-term investing. Over the long-term, taking equity risk is generally rewarded.
  • These events should also be taken as an opportunity to have a conversation with clients to ensure that their investments are in line with their risk profiles.

Geoff Stein, David Wolf and David Tulk (Fidelity Managed Portfolios, Balanced Private Pools, Monthly Income Suite) believe the severity of this sell-off has primarily been caused by panic more than any long-term structural impairment. However, this panic will likely elicit a response from central banks, eventually limiting this drawdown. The portfolio managers continue to be prudent and diversified within their portfolios, are looking at macro themes that will unfold over 1-3 years and are not overly concerned by sporadic increases in volatility or risk aversion. They are of course remaining vigilant in looking for opportunities to respond should the market deviate significantly from what they think is appropriate and their current positioning allows for that flexibility.

Mark Schmehl (Canadian Growth Company, Special Situations, Global Innovators, CanAm Opportunities) remains constructive on the equity market despite the recent uptick in volatility. He believes that the impacts stemming from COVID-19 are transitory and will not last over the long-term. He thinks the market will start to ignore the headlines eventually. Mark is committed to his investment philosophy: looking for positive changes in companies. He has managed through multiple periods of financial stress and volatility over his career. The recent developments do not change his long-term outlook, as it impacts short-term sentiment more than long-term fundamentals. On the margin, he is taking the opportunity to add to some of his favourite names that have been negatively impacted.

Steve MacMillan (American Equity, Small Cap America, CanAm Opportunities) notes COVID-19 has significantly contributed to the heightened volatility that the market has experienced. It is clear that it will have an economic impact but the magnitude of this damage is hard to predict as the number of cases continues to rise globally and there is minimal insight into medical advancements. This uncertainty is negatively impacting investor sentiment. In these periods of higher volatility, investors will likely be presented with more opportunities to make mistakes - and to panic. Steve's goal is to reduce those opportunities by offering a risk profile that is lower than that of the overall market, but still exposes investors to the return potential of investing in equities. Looking at the U.S. economy as a whole, we have been in the late stages of the economic cycle for quite some time now. There is a chance that if the virus continues to spread that it could tip the economy into a technical recession. That said, times like this provide a stern reminder that diversification and capital preservation are imperative to achieve long-term goals.

Dan Dupont (Canadian Large Cap, NorthStar) is excited about the recent heightened volatility as it provides more opportunities to buy stocks he likes at cheaper prices. In his view, episodes of pullback like this should remind investors the importance of capital preservation and downside protection. Currently he is taking a closer look at Canadian oil and gas companies as he believes they are being undervalued by the market. He is also buying across other sectors where suitable opportunities arise. For example, select financial companies have become significantly cheaper in his opinion, offering him an attractive entry point.

Will Danoff (Insights, Global Growth and Value) continues to have a positive long-term outlook. Regarding this recent volatility, Will does not overreact to short term movements as he sees these occurrences as buying opportunities to add to his favourite positions. YTD, ending Feb. 27, 2020, Insights Class (Sr. F) is outperforming the S&P 500 Index by over 400 bps and even over this past week of volatility (from Feb. 21, 2020 to Feb. 27, 2020) he is outperforming by over 50 bps. Will has experienced several 10-15% corrections over the last few years but he continues to use these periods to upgrade the portfolio.

Final thoughts - 10 things to remember when volatility strikes:

  • Volatility is a normal part of long-term investing
  • Long-term investors are usually rewarded for taking equity risk
  • Market corrections can create attractive opportunities
  • Avoid stopping and starting investments
  • The benefits of regular investing tend to stack up
  • Diversification of investments helps to smooth returns
  • A focus on income increases total returns
  • Investing in quality stocks delivers in the long run
  • Don't be swayed by sweeping sentiment
  • Active investment can offer benefits in periods of increased volatility