By Maurice Walch
So, the second longest bull market since the Second World War finally had a 10 per cent correction in January. Prior to the pullback, many market observers had been commenting on the length of the run and saying that the clock was ticking for the correction.
Added to this fairly obvious prognostication (what goes up, does eventually come down) were comments from professional investors that it was time to start taking profits from what they felt was an over-valued market. Even after the recent pullback, negative sentiments were being reported. The Caisse de Depot, Canada’s second biggest public pension fund manager, recently stated that they were starting to build cash reserves to take advantage of further pull backs.
At Mackenzie Investments, Paul Musson currently holds close to 30 per cent of his Ivy Foreign Equity portfolio’s assets in cash. Most active portfolio managers generally keep only about five per cent of their holdings in cash to be fully invested. Mr. Musson is of the belief that appropriately priced stocks are currently hard to find and have been for a while now. So, he waits for opportunities to come.
In contrast there are some portfolio managers who argue that while they expect much more volatility for 2018 than last year (when there was none), they feel we are still in for positive markets for the near future.
Senior management at CI Signature Global Asset Management are all in. They believe the recession occurred in 2015 and we are at the beginning of the business cycle. Growth is on around the globe according to their research as the US, Europe, and other developing nations are all experiencing growing economies. In fact, they believe that to get returns matching the U.S. equities long term return of about seven per cent, the required asset allocation is closer to 10 per cent bonds, 10 per cent U.S. equities, and the rest of the assets heavily invested in international equity markets.
The Oracle of Oklahoma, Warren Buffett, agrees that stock prices are elevated, but for the long-term investor, U.S. stocks are the place to be. He thinks that a 10 per cent bond weighting is enough and scoffs that those long-term investors running for heavier weightings in corporate bonds are overpaying for the amount of risk they are taking on. In other words, in attempting to reduce the risk through the purchase of bonds they are in fact increasing their risk of loss.
The common denominator amongst these portfolio managers is that we are in for a bumpier ride than last year but for the active, long-term investor this is good news. Volatility means that opportunities to buy quality stocks at lower entry points may occur over the next year. So, keep a little cash in hand and be prepared to move when you or your professional advisor see stocks with strong fundamentals on sale.
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