As we come to the end of the first quarter of 2022, it is clear that the markets continue to be volatile, with ups and downs alternating at a brisk pace. The difficult global events that we are currently experiencing are casting a cloud of uncertainty over all global markets.
Note, however, that despite this unpredictability, attractive gains have been made, which further complicates things for investors. How to find your way in these fluctuating markets and, above all, how to stay the course?
Let’s put current events into historical perspective and examine past market movements, their magnitude and duration, to find answers.
Market spotlight: Europe, Asia, South America
For the purposes of my analysis, I decided to focus on various European, Asian and South American stock markets, and to exclude the U.S. and Canadian equity markets, which are constantly under the scrutiny of financial analysts. The markets I have selected are less commented on, but they regularly find their way into investors’ portfolios, especially through ETFs (exchange-traded funds). As these are also developing markets, they tend to be more volatile than developed markets.
My choices fell on:
- France, Germany, Italy and Spain for Europe
- South Korea, Taiwan and Japan for Asia
- Brazil for South America.
What history tells us
I looked at the behaviour of these stock markets over the past 21 years, from 2001 to 2021 inclusively, week by week (for a total of 1075 weeks).
I calculated the number of times each of these markets was up one year (52 weeks) later. I was also interested in the declines these markets experienced:
- first, periods of decline of at least 15%, without a rise of at least 15% during the same period;
- second, periods of decline of at least 30%, without a rise of at least 30% during the same period.
Generally, a market decline of 15% is considered average, while a decline of 30% is viewed as major.
The results of my research surprised me.
Constantly fluctuating markets
I quickly noticed that market declines of 15% are frequent: the Brazilian market, for example, experienced 67 declines of at least 15% in 21 years. However, at the time of writing, this market was up more than 30% year to date in 2022! On average, the markets I studied have experienced 34 declines of at least 15% since 2001.
If we look at drops of at least 30%, they are rarer: in 21 years, the average is nine (and you probably remember some of them!).
A decline, followed by a rebound
What emerges from this analysis is that for all 1075 periods studied, the markets were up 59.70% of the time six months later. Same scenario for one year later, with the markets up 59.83% of the time over the 1075 periods. These statistics are thus favourable for investors: the data tell us that the markets are more often up than down, and that they have a natural tendency to rise.
|
Stock Market Data |
|||||
|
Country |
Market ticker symbol |
Frequency – 15% declines |
Frequency – 30% declines |
Over 26 continuous weeks during 1075 weeks |
Over 52 continuous weeks during 1075 weeks |
|
Brazil |
EWZ |
67 |
16 |
57.30% |
55.81% |
|
South Korea |
EWY |
44 |
14 |
64.74% |
59.81% |
|
Taiwan |
EWT |
36 |
9 |
66.23% |
63.91% |
|
Italy |
EWI |
31 |
8 |
51.91% |
56.09% |
|
Germany |
EWG |
30 |
8 |
74.79% |
71.53% |
|
France |
EWQ |
27 |
6 |
56.65% |
60.74% |
|
Spain |
EWP |
25 |
8 |
49.21% |
53.86% |
|
Japan |
EWJ |
25 |
6 |
58.23% |
55.35% |
*Source: TradingView
Calculations: David Raymond, CMT, CFA®, Market and Investment Specialist
Interestingly, stock markets that have greater sector concentration1 tend to experience more frequent declines, both of 15% and of 30%. An excellent argument to underscore the importance of sound portfolio diversification.
The lessons of volatility
The data I have presented to you provide a more accurate picture of the phenomenon of volatility.
- Volatile stock markets seem to threaten your peace of mind and your financial security. They can also elicit emotional reactions, which can lead to poor decision making.
- If you place market events in a historical context, you realize that these events are temporary: in fact, they are part of the market’s dynamic – its ebb and flow – and they often provide investment opportunities for experienced managers.
- With sound diversification of your portfolio, you can take advantage of these market opportunities to maximize your returns.
- Your financial plan was developed for the long term, taking into account your personal and professional objectives. Don’t give in to the temptation to sell your investments in a bear market: you risk losing a good part of your accumulated returns, with no real possibility of gaining them back, since determining the right time to re-enter the market is very difficult.
- Recognizing investment opportunities requires knowledge and mastery of stock market data to manage the risk of "everything going down at the same time," which could destabilize your investment portfolio.
At fdp, our teams of internal and external managers proactively ensure optimal diversification of our funds and effective risk management.
If you have any questions, discuss them with your advisor and don’t hesitate to share your concerns.
David Raymond, CMT, CFA®
Market and Investment Specialist
1 Sector concentration calculated using the Herfindahl-Hirschman method.
