Why volatility is not a reason to cut losses

It’s been a ‘harrowing’ time for investors but CEO says the tide can be stemmed and not all asset classes are suffering

Why volatility is not a reason to cut losses

Being an investor this week has been enough to raise the blood pressure and induce a few sweat beads. But Kevin McCreadie, CEO and CIO at AGF Management Ltd, believes this volatility – however extreme it might feel – is not enough of a reason to cut losses and run for cover.

He admitted the past two weeks have been “harrowing”, featuring seven straight days of losses wiping out trillions of U.S. dollars in stock market value, the biggest one-day point gain ever for the Dow Jones Industrial Average, the first emergency rate cut by the U.S. Federal Reserve in more than 10 years, and Monday’s heavy losses, circuit breakers and trading halt.    

The rollercoaster ride is not over, McCreadie added, as long as the coronavirus continues to spread and increases the threat of a global recession.

“While the circumstances driving stocks lower this time around may be different than in prior instances—and harder to grasp as a result—there’s every chance that the current market correction will end in the same way that others have before it: with a rebound in prices that eventually leads to market gains and new all-time highs.”

That doesn’t mean investors should kick back with a cigar and a cold one. There is no doubt the virus is a global health risk that’s compromising the strength of the global economy. To further complicate matters, an oil-price war has broken out after Saudi Arabia’s surprise cut.However, McCreadie believes there are factors at play that could help stem the tide given time.

In fact, several of the world’s largest multinational companies have already warned about its impact on future earnings and supply chain disruptions seem inevitable in the weeks ahead. Further complicating matters is the beginning of global oil-price war that resulted in the biggest drop in crude prices since 1991 on Monday after Saudi Arabia’s surprise price cuts kicked off a production war with Russia.

Still, other factors are at play that may help stem the current tide over time, including the quick response of the U.S. Federal Reserve and several other central banks, and the likelihood of some form of fiscal stimulus from G7 countries.

McCreadie said: “Beyond these efforts to offset the economic impact of the virus, it’s also important to remember that not all asset classes are suffering. Government bonds have rallied hard in recent weeks with the long end of the yield curve providing double-digit gains year-to-date. Other safe havens like gold have also performed well and many liquid alternatives that use long/short strategies have done the same.

“In other words, caution, not panic, should be every investor’s mindset going forward. While it’s likely weeks before the full economic impact of the coronavirus is better understood, there is good reason to believe a deep recession can be avoided and that market losses can be mitigated by a broadly-diversified portfolio that includes stocks, bonds and alternative asset classes and strategies.”