Traders work on the floor of the New York Stock Exchange (NYSE) on March 25, 2019, in New York.Spencer Platt/AFP/Getty Images
Canadian investors trying to dodge last fall’s sell-off in U.S. stocks did a poor job of timing the market on both the way down and the way back up.
Only after U.S. equities suffered their worst correction of the past decade did Canadian shareholders go into heavy selling mode, according to Statistics Canada’s latest international transaction data.
By that time, however, the rally was already on, as the S&P 500 index started the year with a double-digit gain while many would-be market timers were still retreating from U.S. equities.
“It’s typical. Money flows in after stocks have gone up and it flows out after the market goes down,” said Murray Leith, director of investment research at Odlum Brown.
“Investors are their own worst enemies.”
As this latest market swing helps to illustrate, market timing strategies can be difficult to execute and most investors would be better off just staying put, Mr. Leith said.
The market’s losses in last year’s eventful final quarter were concentrated in the months of October and December, when the S&P 500 declined by 6.9 per cent and 9.2 per cent, respectively.
In both cases, the month afterward saw Canadian investors shedding U.S. equity exposure. In November, net Canadian flows in U.S. stocks declined by $11.2-billion from the month prior, and in January by $8.5-billion.
“Canadian flows into American stocks closely track movements in the S&P 500, but with a lag,” wrote CIBC economist Katherine Judge.
That kind of delayed reaction can backfire particularly when the market is changing directions from one month to the next, Ms. Judge said. The data in Statistics Canada’s report cover only cross-border portfolio transactions, so they don’t show how Canadian investors reacted to domestic volatility in recent months.
But the report does include both retail and institutional flows in and out of U.S. stocks, Ms. Judge noted. “It goes to show that even for professionals, timing the market is a tricky proposition.”
There is plenty of research suggesting that market timing typically serves to erode investor returns, for a few important reasons.
The first is the risk of an early exit. Whatever economic or market conditions trigger a sell signal can persist for a very long time before the market ultimately peaks.
And the final stages of a bull market can be among the most lucrative. A recent report from Wells Fargo & Co. showed average historical returns in U.S. large-cap stocks were highest at 12 months’ prior to the start of a recession, at nearly 25-per-cent annualized.
The early days of a stock market recovery, meanwhile, can also be wildly profitable. After the market bottom of March, 2009, for example, the S&P 500 rose by nearly 40 per cent in the first three months alone.
“That’s where so much of the activity happens,” said Frederick Vettese, a former actuary and an author on investing for retirement, in referring to both the start and end of a bull market.
“If you miss either one of those, you miss an awful lot,” Mr. Vettese said.
Even for those who manage to successfully avoid a downturn, they face another key challenge in deciding when to re-enter the market.
If they wait too long, they risk missing out on those relatively few days that can make an investor’s entire year.
Between 1996 and 2016, the S&P 500 produced a compound annual growth rate of 7.7 per cent. Excluding just the 20 best trading days over this two-decade period would have reduced that annual return to 1.6 per cent, according to a 2017 Investors Group Report.
“You can make nine good market timing calls out of 10,” Mr. Leith said. “But the one that doesn’t work totally undermines your long-term performance.”
Take home ownership as an analogy, Mr. Leith said. People tend to build wealth in their homes because they hold the asset over a long period of time, rather than selling if they think a recession is coming, he said.
“People should do that with stocks, too.”
canadian-u.s. equity flows
vs. s&p 500
Canadian investors purchasing U.S. stocks have
lagged the market’s movements through the
recent bout of volatility – selling the month
after a big slide and buying the month after a
rebound.
S&P 500
(% change)
Canadian net buying of
U.S. stocks ($ billions)
10%
$10
8
6
5
4
2
0
0
-2
-5
-4
-6
-10
-8
-10
-15
-12
F
M
A
M
J
J
A
S
O
N
D
J
2018
‘19
Note: For both series, the numbers are
month-over-month change
THE GLOBE AND MAIL, SOURCE: bloomberg
canadian-u.s. equity flows vs. s&p 500
Canadian investors purchasing U.S. stocks have
lagged the market’s movements through the recent
bout of volatility – selling the month after a big slide
and buying the month after a rebound.
S&P 500
(% change)
Canadian net buying of
U.S. stocks ($ billions)
10%
$10
8
6
5
4
2
0
0
-2
-5
-4
-6
-10
-8
-10
-15
-12
F
M
A
M
J
J
A
S
O
N
D
J
2018
‘19
Note: For both series, the numbers are month-over-month change
THE GLOBE AND MAIL, SOURCE: bloomberg
canadian-u.s. equity flows vs. s&p 500
Canadian investors purchasing U.S. stocks have lagged the market’s movements
through the recent bout of volatility – selling the month after a big slide and buying
the month after a rebound.
S&P 500 (% change)
Canadian net buying of U.S. stocks ($ billions)
$10
10%
8
6
5
4
2
0
0
-2
-5
-4
-6
-10
-8
-10
-15
-12
F
M
A
M
J
J
A
S
O
N
D
J
2018
‘19
Note: For both series, the numbers are month-over-month change
THE GLOBE AND MAIL, SOURCE: bloomberg
Tim Shufelt