U.S. equity markets are now approaching correction territory. Is the heightened volatility the new normal and what does that mean for your portfolio? Adnann Syed, Sr. Portfolio Manager, TD Asset Management, talks to Sara D’Elia about why equities are dropping, triggers to watch for, and offers strategies to cope with volatile markets.
The market roller-coaster ride is back with US equity markets now in correction territory. Investors are asking if volatility is back for good, and how is this going to affect my portfolio? Joining us today is Adnann Syed from TD Asset Management. Thanks for being here.
So I have to ask you-- over the last 10 days, we have seen what I would call indiscriminate selling, which often is associated with things like a housing crisis, or a debt crisis, or a recession. What do you see happening? Are we at that point from an economic standpoint?
Well, volatility is indeed back. And after two years of relative calm, it does seem hairy that markets are on a roller-coaster ride. But that being said, the factors that you've described-- which traditionally have resulted in some major corrections in the stock market over the past few decades-- none of them are present right now. What we are seeing indeed are strong economic fundamentals, better earnings picture. However, the present bout of volatility is likely coming from maybe there were concerns about higher valuations, and especially, bond yields, which are making equities on a relative basis slightly less attractive.
What I'm hearing you say is you don't think there is an underlying tone from an economic standpoint that leads the market to or leads people to believe that there's a crisis looming. So do you think this is healthy? Is the volatility something we should expect for a long time? Because it's often referred to as a fear gauge. So is now the time to fear?
The present volatility is really I consider it as the market becoming a little bit more normal. For market to just rally, rally, rally, without any correction-- in 2017, we saw every single month US equity market was rallying. That was kind of an outlier. We are seeing market calibrating its expectations a little bit more, which has resulted in higher volatility.
You mentioned the rally, rally, rally. Over the last couple of years, investors often would open their account and see everything in the green. And over the last 10 days, that's probably not the picture. So people may be logging in to look at their portfolio and be in panic mode. What would you tell them in terms of asset allocation, diversification, are there better geographies, is it stocks versus bonds? What are you doing right now?
So first of all, I would ask investors not to panic. What we are seeing is actually fairly regular, and as investors we all have to have a longer term perspective. We cannot take the last two years as indicative of how the market is going to perform forever. We should also not take the last 10 days as how market is going to perform going forward as well. We should consider them as part and parcel of how a regular market functions, which means that time and again it corrects itself, and as I said, calibrates its expectations.
That being said, this environment of higher volatility really brings home the importance of diversification in our clients' portfolios. And diversifications could be in various forms. It could be across assets. So not every asset moves together all the time. It could be across geography. Some countries are doing well compared to others and vice versa. And third, there could be significant diversification even within asset classes as well.
And tell us a little bit about that, because you mentioned to me that, for example, within stocks there are differences.
There are. So there are growth stocks, which tend to do really well when the economy is doing well or when expectations are high. Or there are quality stocks that tend to resist the downside move as well. And there are some stock portfolios which are focused on reducing volatility, using various parameters. And these portfolios could do really well during periods of these market corrections, as we're seeing right now.
And then bottom line, for investors, what should they take away during these times of high anxiety?
Investors should stay the course. Investors should focus on building their long-term wealth, in which equities are an indispensable part of their portfolio. And they should also focus on diversification to reduce risk in the portfolio and keep thinking long-term.
Adnann, thank you very much for being here.