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Rates & markets

RYAN   By Guest Blogger Ryan Lewenza

Are you having fun yet? When I said in our outlook blog post that the equity markets would be more volatile this year, I didn’t expect it to come in the first few weeks of January. Year-to-date the S&P 500 is down 9% and the hard-hit Nasdaq is down 15%, while the TSX is down a gentler 3%. What gives?

Well as I predicted, higher interest rates and tighter monetary policies from key central banks would likely trigger these short-term bouts of volatility as the equity markets recalibrate to these tighter policies. The days of easy money from central banks are over and markets are adjusting accordingly.

Indeed, since December the US 10-year treasury yield has surged from 1.4% to 1.8%. And this week we saw the Federal Reserve (Fed) and Bank of Canada (BoC) set the stage to start hiking rates at the next meetings in March.

Bond Yields Surge Higher

Source: Stockcharts, Turner Investments

I actually think the BoC made a mistake by not hiking this week as they clearly have to with inflation at a 30-year high. Additionally, the markets had largely priced in a hike so when markets give you a pass or ‘green light’ you take it. But nonetheless, rates are going up, which has led to this recent market volatility and pullback. And based on decades of market history, this is exactly what we should expect.

Below is a chart that shows the average performance of the S&P 500 around past Fed tightening cycles. I calculated the average 1, 3, 6 and 12 month performance following the start of these cycles going back to 1980.

Note how the S&P 500 typically declines in the first month and quarter following the beginning of the rate tightening. But critically, the S&P 500 then recovers and is up on average 2.5% six months following and up 5.9% one year later. In fact, in only one of the seven tightening cycles was the S&P 500 down 12 months following the start of the Fed hiking and it was down just 1.3% (1984 cycle).

So, equity markets quickly re-align to the higher interest rates and tighter monetary policies but then rally as the economy keeps growing and corporate profits keep rising. That’s the key point. This is normal, and remember that the central banks are hiking rates because the economy is doing better, which is supportive of corporate profits and stock prices.

S&P 500 Average Performance Following Fed Rate Hikes

Source: Bloomberg, Turner Investments

Moreover, market volatility is normal! Nothing goes straight up. The markets need to pullback from time to time to digest gains, ensure markets don’t overheat too quickly, and to recharge ‘internal energy’ to steel a phrase from my old pal and colleague Jeff Saut.

Let’s review some important market facts:

  • First, on average the S&P 500 experiences three 5% pullbacks and one 10% correction per year. Currently, the S&P 500 is in official correction mode (down more than 10% from the peak) but this is nothing out of the ordinary.
  • Second, take a look at the chart below. While it’s a busy chart it provides a lot of info and insight. The chart shows the annual return for the S&P 500 (in blue) and the largest intra-year decline (red diamonds) for each year going back to 1980. For example, in 2020 the S&P 500 had an intra-year or peak-to-trough decline of 35% (that was one for the books) yet managed to return 16% on the year. So this shows that it’s common to see large declines but then still experience positive returns on the year. The other key takeaway from this chart is the average selloff for the S&P 500 in any given year is 15%, yet with an average annual return of over 10%.
  • Finally, bear markets, defined as a greater than 20% market drop, are mainly (70%) driven by economic recessions, which we do not see in the cards for 2022. So while this correction has been unpleasant we don’t see it spiraling into a bear market.

I subscribe to Winston Churchill’s belief that “Those that fail to learn from history are doomed to repeat it”, which is why I’ve always studied and leaned on market history in making my calls and recommendations over the years. It’s not infallible of course, but based on market history, combined with our views that the global economy will continue to recover and grow this year, we remain optimistic that markets will grind higher throughout year. But as we’ve stated clearly in recent posts here, it’s going to be a bumpier ride so buckle up.

S&P 500 Annual Returns with Intra-Year Selloffs

Source: Bloomberg, Turner Investments
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Glory days

DOUG  By Guest Blogger Doug Rowat


“Old age is like a plane flying through a storm. Once you’re aboard there’s nothing you can do.”  – Golda Meir

My father once joked that young people think old age is a club that they can opt out of. Well, of course, there’s no opting out. We all age, and inevitably decline both physically and mentally. And, if we’re not careful, our finances may decline as well.

A client approached me recently concerned about his 75-year-old father’s erratic investment decisions and subsequent declining portfolio. I sat down with his father and we reviewed his self-directed investment accounts. As I feared, it was an incoherent mix of poorly performing securities. Despite an underlying bull market, the portfolio had meaningfully fallen over the previous five years. Regrettably, failed portfolios managed by elderly investors are something I see frequently.

Successful investing is largely ability-based. Luck, of course, sometimes plays a role, but investors who effectively process market variables and conduct thorough analysis, generally speaking, get results. In other words, if you have skill, you’ll do better. But, unfortunately, our investment skill declines as we age and declines very rapidly when we’re in our 70s and 80s.

I’ve touched on this subject before when I highlighted the work of David Laibson, an economics professor at Harvard University, who starkly illustrates how cognitive impairment, on average, begins at about age 52 and then rapidly accelerates from there:

“If the chance of getting a disease is 10%, how many people out of 1,000 would be expected to get the disease?”

Source: David Laibson, Harvard University, 2009

But his research is not unique. In the latest The Atlantic, journalist and academic Arthur C. Brooks highlights the work of Benjamin Jones, a professor at Northwestern University’s Kellogg School of Management. Jones examined major inventors and Nobel winners over the past 100 years and noted that the most common age for producing a magnum opus was in the late 30s. However, “the likelihood of producing a major innovation at age 70 is approximately what it was at age 20—almost nonexistent.”

Brooks goes on to highlight the work of others who have also studied age and declining ability:

Scholars at Boston College’s Center for Retirement Research studied a wide variety of jobs and found considerable susceptibility to age-related decline in fields ranging from policing to nursing. Other research has found that the best-performing home-plate umpires in Major League Baseball have 18 years less experience and are 23 years younger than the worst-performing umpires (who are 56.1 years old, on average). Among air traffic controllers, the age-related decline is so sharp—and the potential consequences of decline-related errors so dire—that the mandatory retirement age is 56.

In sum, if your profession requires mental processing speed or significant analytic capabilities…noticeable decline is probably going to set in earlier than you imagine.

Now, you might argue that you’re simply a private investor, not a major league umpire or an air traffic controller. But the decline in performance with age is similar. George Korniotis, a former financial economist at the Federal Reserve in Washington DC, and Alok Kumar, a finance department chair at the University of Miami, examined investment performance versus aging in a landmark 2007 study. They focused on the investment behaviour and performance of more than 62,000 investors who traded common stocks. While older investors do many things right, namely trade less frequently, they are ultimately hampered by their declining abilities. Korniotis and Kumar’s conclusions were blunt:

But consistent with the cognitive aging hypothesis, we also find that older investors have worse investment skill, where skill deteriorates sharply around the age of 70. Examining the economic costs of aging, we find that older investors earn about 3–5% lower returns annually on a risk-adjusted basis. Collectively, our evidence indicates that older investors’ portfolio choices reflect great knowledge about investing but their investment skill deteriorates with age due to the adverse effects of cognitive aging.

Their research results are shown graphically below. Note how closely the basic pattern and the rapid rate of decline mirrors David Laibson’s chart above.

Investing performance declines sharply as we age

Source: George Korniotis and Alok Kumar. Performance differential is the change in the performance between the last two and the first two years of the sample period. The individual investor data are from a large US discount brokerage house from 1991 to 1996. In other words, the differential is showing that the performance of older investors has rapidly gotten worse in a short period of time.

In short, cognitive decline is inevitable. No one is immune. It also probably happens much sooner and accelerates much faster than many expected. So, as we age, there’s absolutely nothing wrong with asking for help with our investments.

It can be tough to accept, but your best investment decision may be recognizing that you can no longer make good investment decisions.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.