Navigating the cycles – markets and otherwise

Editor's Note

This article is sponsored by Alan MacDonald, an investment advisor with RBC Dominion Securities Inc.

Last year, I sold my house in Ottawa and moved to a new place where my family cottage once stood. The timing, while pretty perfect, was purely accidental.

We had actually decided to tear the cottage down and build a full-time home back in November 2019. By the time COVID-19 struck, the work was already underway, and it was too late for second thoughts. We officially moved into our new home in June 2020. Thanks to the pandemic, my return to my regular office is still in limbo. Until then, my new workspace is a home office overlooking beautiful Bass Lake.

Now that I’ve been living on a lake for more than a year, one of the striking things I’ve really started to notice is the way that nature’s cycles tend to repeat. Every year, the swans show up in the spring just after the ice melts, and then drop by again on their way south at the end of November. The eagles hang around a bit longer before getting together in a group to migrate. Otters, loons and even the water itself all have similar routines that reliably come and go with the seasons.

This led me to thinking about the cycles we often see in other parts of our lives. Take the markets as an example. In 2009, I wrote an article about preparing for the day when the S&P 500 would hit 3,000. At the time, it probably seemed hopelessly optimistic. On the day I wrote the article, the index had just closed at 1,150. That was down almost 50 per cent from its pre-crash peak in 2007.

But there wasn’t really anything particularly optimistic about my prediction. As Jeremy Siegel points out in his definitive book, Stocks for the Long Run, market cycles – even big ones, like we saw in the financial crisis of 2008 – tend to even out over the long run. In fact, if you’re looking at 20-year time periods, market returns are even more reliably consistent than Treasury bills.

It’s not just the long-term changes that repeat themselves, either. The markets are full of short-term cycles that replay year after year. Every year, for instance, intra-year changes in the markets average out at about 15 per cent. That could be 15 [er cent up or 15 per cent down, but whether times are good or bad, you can always count on some dramatic price movements.

Currencies are another place where we can see cycles come and go. When I was writing that article in 2009, the Canadian dollar was above par with the U.S. greenback. Oil had hit $170 a barrel in June 2008, and U.S. real estate had fallen off a cliff just a few months later.

And in equities, there’s no denying that U.S. stocks have dominated for most of the last decade. They’ve had consistent double-digit returns, while Canadian and international markets have languished behind by comparison. This, too, will likely change.

There’s another long-term cycle known as “regression to the mean,” which says that above-average returns tend to gradually diminish, while below-average returns generally inch back up to their long-term average. This means there are likely to be some good years ahead for the Canadian and international markets, and with the Canadian dollar coming off of a nice run-up, it might be a good time to put some Canadian dollars to use buying international stocks.

But there’s one big difference between market cycles, and the natural cycles I can see from my lakefront window. While nature likes to be consistent year in and year out, the markets don’t follow any particular pattern in the short term. That’s why, if you want the markets to work for you instead of against you, your financial planning needs to focus first and foremost on the long term.

In my experience, the most successful investors always work with a long-term plan, while the biggest mistakes tend to come from impulsively reacting to (or worse, trying to predict) short-term events. So today, with the S&P 500 up around 4,200 and the Canadian dollar trading at about 83 cents U.S., what advice are we giving our clients?

The first thing we tell them to keep in mind is that the S&P 500 is going to hit 10,000. We may not know when, and there might be quite a few ups and downs between now and then. But if the cyclical nature of market history tells us anything, it’s that the index will eventually reach the 10,000-mark, and then it will keep on climbing higher after that.

When it does, you want to have your portfolio set up to take advantage of the kind of long-term growth that only a broadly diversified mix of equities can deliver.

This article is supplied by Alan MacDonald, an investment advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund.