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Observations from 2018, Optimism for 2019

As 2019 starts, the market continues its gyrations that began in September 2018. Volatility has indeed increased over the last 3 months but only relative to the last 2 years where it has been quite subdued. We go back 100 years (i.e. since 1920) and look at the day-to-day and intraday volatilities and our conclusion is that markets exhibit nothing more than normal volatility. However, investors have been more conscious of every small move thanks to the internet and the media, making it feel like things have changed. In fact, financial news reporting has changed, not for the better but for the worse.

In times like these, we urge our clients to stay put, keep their eyes on the horizon and avoid looking at the waves in front of them. Here are a few reasons we should stay calm:

A basic strategy that has stood the test of time is one of Dollar Cost Averaging: instead of trying to time the market, most investors should buy the same amount of money in equities in regular intervals in time: for example, investing $2,000 every month over a long period of time. This strategy fulfills several sound principles of investing:

Lots of questions have been asked related to our fixed income strategy. While we have not re-invented the wheel, we do manage it in a very different way because we define the objectives of our fixed income portfolio very differently:

Our strategy is not unknown to other managers. There are plenty of empirical studies that prove our point. However, scalability is the biggest problem when funds under management become too large. Liquidity, availability and sourcing of products become problematic and since most of our competitors are mutual funds managed by big financial institutions, management costs become prohibitive relative to simply buying government bonds or highly liquid corporate debentures.

For now, we do not have a size problem as bond markets worldwide are large enough for us not to have to worry for a while.

How cheap or expensive are the markets worldwide anyway? Here are some statistics:


Geography Representative indices P/E multiple
US MarketS&P 50017.1x
Canadian MarketS&P/TSX 15.6x
Rest of the WorldMSCI EAFE13.4x
Emerging MarketsMSCI  EM11.5x


Compared to worldwide interest rates:


CountryRepresented byRatesP/E multiple Equivalent
USAUS 10-year treasury2.80%35x
EuropeGermany 10-year bunds0.15%666x


As you can see, while equity markets worldwide are no longer at bargain levels of 2009, compared to interest rates, they are far from being expensive. As central banks try to “normalize” their monetary policies, markets could stay volatile for a while. Economic growth might stall for a period of time but unless a nasty recession shows its face, equity markets are expected to perform in line with history.

Happy New Year!

The Claret Team