What Is 'The Market' Anyway? And Why It’s Not the Whole Story
Sometimes in my client conversations the term “the market” is invoked, most often as a noun, as in “what is THE MARKET doing?” or “how did THE MARKETS perform?” or “how does Donald Trump’s latest headline affect THE MARKET?”. I must confess that I also slip into thinking of “THE MARKET” as a sentient, singular and temperamental being. So please forgive me if what I am saying seems redundant. I think it’s good to reflect on what the market is, what it is not and why this matters.
Defining THE MARKET
There are physical markets such as the St. Jacobs Farmers Market (just down the road from our office), there is a labour market where employers seek employees and workers seek jobs, and financial markets where financial instruments such as stock, bonds and currencies are traded. In economics, a market refers to “any structure that allows buyers and sellers to exchange any type of goods, services, or information, influenced by factors such as supply and demand, competition, and government regulations”.
What is MARKET PERFORMANCE?
Together we own mutual funds that hold stocks and bonds that operate and trade all around the world. Because these securities are publicly traded, investors have an opportunity to buy or sell their them in those markets every business day. To the extent that investors can legally, securely and efficiently trade, we might conclude the market has performed well because it has done what it is supposed to do. But when we make reference to markets performing well, or poorly, it has an entirely different meaning.
I believe this has more to do with supply and demand. For example, five years ago today, the prices being offered for securities traded in US stock markets had dropped by 35.4% in just over one month (February 20 – March 23, 2020). In the first 10 months of 2022, prices dropped again by 26.7%. Did the markets perform poorly during these timeframes? Given the constraints of COVID in 2020 and a rapidly changing interest rate environment, I would argue that markets performed very well because people were able to continue buying and selling despite restrictions (the St Jacobs Market was closed from March to June 2020) and uncertainty in 2022. What was significant about 2020 is that there were very few buyers and many sellers – and this abundance of supply and limited demand is what led to prices declining. In hindsight, one of the best buying opportunities we have had in the past ten years was right around now five years ago, when the market was flush with sellers and very few buyers. (Source: yahoo.ca/finance)
THE MARKET as an Index
Another definition I encounter is the market represents the price of all available securities. Perhaps the best example of this is the S&P 500 index which many of you own in the RBC US Equity Index Fund. Last year this fund increased dramatically in value as demand for the largest growth companies in the world (Apple, Nvidia, Microsoft, Alphabet, Meta, Microsoft, Tesla) increased. When the media is reporting on stock market performance, they will report on the price of the index. If it goes up in value the charts will appear green and if they go down, they appear red. We might feel happy when we see green and fearful when we see red.
The Performance of Your Investments is Different from THE MARKET
The combined value of the 500 largest publicly traded securities in the US decreased by 4.9% during the first quarter, this does not necessarily apply to your investments. At the end of the quarter, I did a review of many client portfolios and almost all of them had increased in value. There are a few reasons for this:
You hold cash in your portfolio either in a separate investment or within your mutual funds. Cash contributed some interest income to the overall value during the first quarter.
For the first time in a long time, the value of bonds increased over the course of the quarter while the value of shares in the broader market decreased. This was helpful.
The value of the securities in the EdgePoint Global portfolio increased by 3.1% during the quarter. This is neither something to celebrate or worry about, but it is noteworthy. EdgePoint portfolios are actively managed investments whose performance is very different from the market. In my experience, an actively managed mutual fund will often perform relatively well when prices in the overall market drop. This is generally due to two main factors:
The businesses in the portfolio have been carefully researched and selected for the portfolio based on factors such as their value and resilience.
The managers have avoided investing in securities that are popular when values are going up (think: Tesla).
We are committed to assisting you with reaching your financial goals. We address planning, estate and tax issues, and we also use both market-based AND actively managed mutual funds because we believe this is the optimal solution to get you to where you want to go without too many ups and downs along the way.
