It’s been a tough first half of the year. Lingering inflation, tightening central bank policy, high oil prices, COVID concerns, and geopolitical tensions remained top of mind for investors. Despite the volatility we’ve experienced, there is a silver lining. Economic fundamentals such as consumer demand, wage growth, the job market and corporate earnings remain healthy.
Whether this is a correction, if we’re close to the bottom or if this is the start of something more concerning, no one really knows for sure. But what we do know is that staying invested through these bouts of volatility has been and is always the right answer.
To help explain, I want to highlight specific periods of expansion and contraction through a few economic cycles. By doing this, it clearly identifies the magnitude and duration of various contractions and expansions. Below shows periods of contractions, defined as declines of at least 10% in magnitude from their recent peaks, and periods of expansions, defined after the index recovers with moves greater than 20% in magnitude beyond their prior peak.
![](https://integrum-wealth.com/wp-content/uploads/2024/07/image-1.png)
The largest contractions took place following the dot.com bubble’s deflation (-48%), the Great Financial Crisis (-48%), and the onset of the COVID-19 pandemic (-37%). However, following these deep contractions were some of the strongest recoveries over the period of 134%, 100%, and 109%, respectively. Although it may take a while to reach a bottom and it may not be a pleasant journey, investors with the appropriate time horizon, discipline, and patience have been rewarded by remaining invested.
Some may argue that this time is different because Canadians are currently facing some of the strongest inflation seen in decades with interest rates expected to rise aggressively in response. However, an interesting comparison is to look back to the 1970’s and early 1980’s, a period known for high inflation, high interest rates and stagflation. During that time, to combat the rise in inflation Canadian interest rates rose from ~5% to over 20% before inflation came under control and back to pre-oil crisis levels. When you compare these periods, the 70’s/80’s vs the 2000’s, we see that things are not that different after all.
![](https://integrum-wealth.com/wp-content/uploads/2024/07/image-2.png)
The average magnitude and duration of corrections between the two periods are almost identical. Additionally, average recoveries were stronger in the 70’s/80’s and tended to last longer. So as time always proves, investors who remained invested were rewarded.
Regardless of where we are in the market cycle, or if we see interest rates closer to the inflationary environment of five decades ago or similar to the past two decades, it’s important remember a few things:
- Rather than giving into panic and moving to cash, as history has shown, staying invested has proven to be a beneficial strategy for the mid to long-term investor
- Adding to your investments, particularly after large market contractions will likely help expedite your portfolio’s recovery
- Always work with a top quality financial advisor who has sophisticated advise and strategies to ease some of the bumps along the way and stay focused on your financial goals
I’m here to support you in achieving your financial goals. Please do not hesitate to let me know if you have any questions.