Expect more volatility as expansion continues

The market’s long, steady rise since the brief bear market in March 2020 may be ending, with more volatility expected in the months ahead. CIBC Asset Management’s chief investment officer said there are reasons for investors to be nervous.

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Luc de la Durantaye said the global economic context will change over the coming year. “We’re likely to move from a policy-assisted recovery that we’ve seen in the last 12 months to a more self-sustained economic expansion,” he said.

While he said that expansion should continue, there’s more for investors to worry about. Markets dipped late last week and again on Monday as fears about inflation gave way to concerns about the post-Covid economic expansion, though equities rebounded on Tuesday.

The U.K.’s much-hyped “Freedom Day” on Monday, marking an end to pandemic restrictions, was overshadowed by the spreading Delta variant and Prime Minister Boris Johnson’s quarantine.

The bond market has been sending alarming signals, with the yield on U.S. 10-year Treasuries as low as 1.14% on Tuesday before rising to 1.21% by end of day. The 10-year yield had briefly topped 1.75% in March.

And central banks starting to remove some of the massive policy support of the past year “will make a number of market participants nervous,” de la Durantaye said.

Adding to the challenge, the pandemic has “distorted” the data central bankers and investors use as guideposts, he said, and regulatory changes for large tech companies are creating more uncertainty for some of the market’s biggest names.

“All of that creates a context where market participants will be more nervous as we move through that transition, and there’s going to be higher uncertainty,” de la Durantaye said. “That is likely to create more volatility in the financial marketplace.”

Even so, the economic expansion is likely to continue, though at a decelerated pace, he said. While the Delta variant is spreading quickly, the evidence shows that vaccines remain effective, he said, and many developing countries could be 60% to 70% fully vaccinated by the fall.

De la Durantaye also pointed to strong job growth and high savings amounts that will be put to use as more pandemic restrictions are lifted.

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Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.