Market selloff not a crisis, but a 'recalibration of expectations'

Amid the stock market volatility due to US President Donald Trump’s global trade war, Canadian asset managers are calling for composure, caution, and a return to strategic fundamentals.

Michael Greenberg, head of Americas portfolio management at Franklin Templeton, noted that the current selloff isn’t surprising in isolation. But what shocked the market, he said, was the “breadth of tariffs, and the questionable nature that came with them.” Particularly, the calculations on which countries would receive a high degree of tariffs.

That uncertainty, he explained, is bleeding into broader economic expectations.

“The potential for recession is definitely rising and stock markets have adjusted accordingly,” he said.

Markets convulsed under the weight of escalating tariff threats and shifting economic signals on Monday, particularly as the S&P 500 sank 0.2 per cent, the Dow Jones Industrial Average fell 349 points, or 0.9 per cent, and the Nasdaq composite rose 0.1 per cent.

The trick for institutional investors now, according to investment experts, is for pension funds to take stock of their long-term positions while navigating immediate risks.

Dustin Reid, vice-president and chief strategist, fixed income at Mackenzie Investments, also agreed that the situation has introduced broad risk-off sentiment.

“Markets are generally taking the tariffs as a risk-off event, and you’re seeing that in most asset classes like equity, fixed income, credit and FX [foreign exchange],” he said.

Notably, Reid sees the current market downturn not as a full-blown crisis but as a “recalibration of expectations.”

“2008 felt very much like a panicky crash,” he said. Contrastingly, the 2020 downturn was “an unprecedented event in terms of a global economic shutdown,” driven by unique public health circumstances.

This time, however, Reid sees markets adjusting more orderly and methodical, as the current volatility reflects shifting assumptions about US economic strength.

“Markets have been generally grinding along well on the tailwind of the expectation of US growth exceptionalism,” he explained.

But over the past several weeks, that narrative has started to fade, he noted, with confidence slipping in response to soft economic data, even though the hard numbers haven’t yet fully reflected that decline.

Still, he emphasized that institutional investors, particularly pension funds, won’t be making sudden shifts based on a few days of turbulence as two or four days of market volatility “isn’t going to move the needle in terms of making big, broad asset allocation changes.”

“You don’t hit the panic button necessarily,” he said. “We’ve already adjusted to be a little more defensive as cracks started to form before we got the big news last week.”

So how should institutional investors respond to the market storm?

“The real approach here is to remain diversified and remain anchored to your long-term models,” said Lorne Gavsie, senior vice-president and head of macroeconomic and FX strategy at CI Global Asset Management.

“Rely on them as opposed to throwing them out suddenly just because we've had a bit of a knee jerk.”

BeiChen Lin also sees renewed validation for diversification, observing that previously lagging asset classes are now outperforming. He pointed to infrastructure as a compelling area for future investment, citing its ability to provide both inflation protection and downside risk mitigation.

Additionally, the current market could prompt broader thinking around portfolio construction, despite growing recession risks in the US and Canada.

“We now see a 50 per cent probability of a recession in the US and an even higher probability of recession in Canada,” said Lin, senior investment strategist and head of Canadian strategy for Russell Investments, noting sentiment has already reached extreme panic levels. He urged investors to stay aligned with their strategic allocations, while remaining alert to future buying opportunities.

“While there is always a risk that “this time could be different,” historically investors who focus on the long-term stand to benefit,” added Lin.

For Greenberg, he emphasized revisiting asset allocation without abandoning the core structure. He suggested even now may be a moment to shift regionally.

“If we’re in an environment where maybe some of that [US exceptionalism] is decreasing… that would suggest having a look at regional equity exposures within plans.”

Reid echoed that view, suggesting the recent market moves could drive “a little bit of a geographical realignment, maybe taking some investments out of the US and allocating them towards other regions globally.”

As for potential bright spots, Reid noted fixed income has performed well in the flight to quality.

“Sovereign fixed income over the last ten years has done quite well,” he said, also pointing to currency trades such as long yen positions delivering returns in volatile conditions.

Greenberg added that while bonds have helped cushion portfolios, they’re now reassessing that position.

“We would be more at the stage of taking some of that off the table and maybe increasing cash balances a little bit because yields have fallen quite a bit,” he explained.

Gavsie believes the recent market correction is helping to bring inflated valuations closer to more reasonable levels, even if they haven’t fully normalized yet.

He sees this as a potential turning point, particularly if tariff tensions ease and their actual economic impact proves less severe than feared, noting the recent moves have “reset asset prices at far more attractive levels.”

While market shocks might be different, the investor response should be ultimately rooted in discipline.

“Lightning rarely strikes twice in the same place but the reaction functions are kind of the same,” said Greenberg. “It's not overreacting but rather sticking to one's long term investment plans and rebalancing where it makes sense.”