Since the start of the year, the flagship indices of the New York and Toronto stock exchanges, the S&P 500 and the S & P / TSX, have gained more than 22%. Since the low on March 23, 2020 caused by the pandemic, these indices have more than doubled.
What to make investors dizzy. They have taken advantage of this upturn, but does the risk of an abrupt decline now threaten the capital gain accumulated over the last year and a half?
High risk for some
Since the start of the pandemic, the money supply has grown by a third, and central banks are keeping interest rates at zero. Faced with this abundance of liquidity and minimal financing costs, it should come as no surprise that the markets are strong, explains Cimon Plante, Senior Vice-President and Wealth Management Advisor at National Bank Financial.
“These favorable conditions probably explain why the stock valuations of some companies in the sectors which are currently popular, such as transport electrification, renewable energy and online commerce, among others, are reaching unreasonable levels,” he said. .
It is likely that these securities could now experience significant declines, if we were to face interest rate hikes, he said. Recall the episode of fall 2018, when the stock markets corrected quickly when the Federal Reserve started to raise its key rate.
Everything is not at risk
But we must not believe that everything is at risk. When the techno bubble burst 20 years ago, it was above all the titles linked to the Internet which had been insanely appreciated and which then collapsed, recalls Cimon Plante.
Overall, the industrial sectors and that of large technology companies have performed well over the past 12 months, but these are advances that are part of the evolution of these companies, explains Mr. Plante. Take the case of Amazon, for example. We can see that the title, after having greatly appreciated in recent years, has been treading water for a year. As for the title of Meta Platforms (Facebook), it has only increased by around 12% since its peak in August 2020.
Rules to follow
It is during these times of worry that investors must remember the main principles that guide the management of their portfolio, underlines Daniel Chartier, vice-president and portfolio manager at Desjardins Securities.
A well-built portfolio starts with a good allocation of assets according to the objectives of the investor, and that must remain, says Mr. Chartier.
If the high level of the markets worries him, the investor can add a certain dose of prudence to his portfolio by reducing somewhat the riskier assets which have appreciated strongly and by replacing them with safer ones, such as bonds. .
Daniel Chartier, Vice-President and Portfolio Manager at Desjardins Securities
Do not try to synchronize with the market
However, it is important to stay well invested according to the plan established and not to fall into the trap of selling in order to buy back later at a better price. “Wanting to synchronize with the market has often been detrimental to those who have tried this approach,” says Daniel Chartier.
The same goes for those who find themselves with new liquidity and who hesitate to invest it given that the markets are too expensive and the risk is too great. “Waiting for a market breakout before investing is always very dangerous,” says the portfolio manager at Desjardins. “It’s better to start now to gradually commit these new funds to the market and not stay completely on the sidelines,” he concludes.