Volatility has returned
By Alfred Lam, CFA
Senior Vice-President and Chief Investment Officer, Multi-Asset Management
In February 2018, stock markets experienced more volatility in one month than in all of 2017. Last year, the maximum drawdown of the S&P 500 Index was -2.8%, meaning that any investor who bought at the top of the market and sold at the bottom would have lost 2.8%. In February, the maximum drawdown was -8.6%. Market sentiments have changed.
The strategy of buying any investment at any price may have worked well in 2017 but likely will not work going forward. This could cause many investors who invested based on gut feelings and profited because of luck, to leave the market. As these investors depart, the demand for investments will likely decrease and elevated prices may begin to fall, leading to a more sustainable economy. Economic conditions have generally been improving due to extended periods of low interest rates and were further boosted by the recent tax cuts announced in the United States.
The market correction in February was aggressive but short-lived, as the S&P 500 Index rallied 8% from its low in a matter of three weeks. Our risk overlay strategy added value during the volatility and we remain committed to using the strategy to protect the portfolio downside.