Day-to-day volatility is a challenge and perspective must be provided to clients, he added
Social media is synonymous with outrage, obsessed with who can react the loudest and grab the most attention. Amid the first global crisis in a time of ‘influencers’ and a Twitter president, collective alarm is amplified.
Zach Davidson, an investment advisor at National Bank Financial and partner with JMRD Watson Wealth Management Team, believes this is fuelling market fear and one of the key reasons the Fed and Bank of Canada moved last week to try to control sentiment.
“News travels fast [on social media] and false information spreads faster because it is more sensational,” he said. “Fear can feed on itself and the Fed cut is trying to assuage some of these fears.”
The Bank of Canada’s subsequent half a per cent interest rate cut was largely expected after the Fed had surprised investors with an emergency decrease by the same margin the previous day. While there are some positives for investors, Davidson said the rare emergency intervention highlights the economic impact to follow.
He said: “The Bank of Canada’s 50 basis points cut has a positive impact for clients that are in the real estate market and looking at a mortgage, or to refinance, as we have already seen lower mortgage rates. It’s also a positive for dividend paying equities as they offer a relatively higher income vs fixed-income investments.
“It’s not positive for savers. GIC rates were already at historical lows, along with other short-term money market instruments.”
The biggest impact, added Davidson, is in the day-to-day market volatility where 3-5% moves are not normal and affect client psychology. Markets were due for a correction in 2020 but the speed of the decline, combined with the unknown of the coronavirus and its economic impact, risks spooking investors.
Davidson said the JMRD Watson team will look to use the volatility to ‘upgrade’ portfolios and buy quality companies that have been indiscriminately sold off. Its base case is that bond yields will remain low allowing investors to pick up income holdings that will provide a healthy income for investors, with a better entry point.
How, though, will he manage client emotions?
“We are advising clients to maintain some perspective, as the markets had an abnormally very strong year in 2019 and selloffs are part of the higher risk premium that equities offer. The markets have experienced corrections before, for many different reasons. There will be others in the future. Having an investment plan that you can commit to, regardless of market direction, is the key to long-term investor success.”
He added: “I do think in the fullness of time there is a risk of an overreaction. The markets did not have ‘coronavirus’ priced in on January 1 or even February 1. The impact quickly was priced in and markets often overreact both to the upside and downside. We know it is very difficult to time the market and a balanced portfolio can help to offset some of the volatility.”