The first days of August are challenging us with a return to the volatility that the stock market has repeatedly experienced over the decades. Days like these truly test the patience of investors. And it is certainly frustrating, coming so shortly on the heels of the major downturn we saw in late 2008 and early 2009.
Many clients are wondering if this is a return to the crisis levels of three years ago. We think this is the third phase of a de-leveraging that has been needed for some time. First we saw consumers (especially US home owners) need to de-leverage from the "no money down" real estate boom of the mid 2000s. Then we saw companies lower their borrowing exposure, shore up their cash reserves and return to paying solid dividends after getting their financial affairs in order.
Now it is the turn of governments to reverse from the excessive borrowing that has been the norm for decades. The "stimulus packages" of the last few years have essentially been borrowing from our grandchildren to pay for today's benefits. Across the globe, those policies did not address the reality of too much spending, and not enough government revenue.
The US political brinkmanship over the debt ceiling did not help the situation last week, and the recent downgrade of US debt is the bitter result. The drop in share prices is somewhat curious given the rapidly improving fortunes of many companies. Auto manufacturers who were so hard hit 3 years ago are repaying their debts. Banks are better financed. Credit markets are functioning. Many companies have strong fundamentals and the dividend yield on stocks in the S&P 500 is above bond yields. Of course company dividends are not guaranteed, but when they present a return that is higher than "guaranteed" investments, it hardly seems prudent to sell out of stocks to move to government bonds, just when some countries bonds are being downgraded.
That being said, Canada is in a good position relative to so many other countries. We are resource rich, have better balanced budgets, well regulated financial institutions and a stable and honest tax base. Emerging markets also provide opportunities for direct investment or for global corporations to continue to create earnings even if established economies stay in low or no growth mode.
While no one can say with certainty what will play out in the days and weeks ahead, many of the portfolio managers (whose updates we have been reading very closely over the last week) remain optimistic. See links, below. Certainly today's strong gains were a welcome rebound:
Where to turn?
For most clients, a review of your current asset allocation will determine if any action is required. We always have the option of lightening up on equity positions and adding to more guaranteed investments. We also have clients who are using this opportunity to put low yielding cash investments back into the markets at bargain valuations. Some clients find comfort having a portion of their investments in commodities like gold, silver or oil, and we can invest for you in ETFs and funds that hold physical commodities. As a side note though, gold mining stocks are not trading as if gold is headed for $2,000; leaving us sceptical about investing in an asset which does not pay a dividend and can be expensive to hold - but gold is one of a few assets hitting record levels so we can't just ignore it.
In summary, ScotiaMcLeod's analysts do not expect a downturn of the magnitude of 3 years ago. The volatility we have recently experienced is an unpleasant but real part of stock market investing. Using this opportunity to review your asset allocation and possibly even add to holdings that have become relatively cheaper can be a sound approach. We are pleased to help you with any questions you may have.
The last several weeks have been quite a roller coaster, as the fluctuations and recoveries in the markets seem to be happening so often. We had the Greek debt crisis, and the "flash crash", the un-pegging of the Chinese currency, and are now heading into the G8/G20. But in general our phones have been quiet; it seems most clients have an appropriate level of risk in their portfolios. We wrote about these events in Issue 257 of the Managed Money Reporter newsletter:
April and May saw significant rebounds in the Canadian and global equity markets. Oil, and the Canadian dollar have risen significantly as well. See our newsletter article on recent market activity:
Mackenzie financial has prepared a good powerpoint presentation outlining the recent volatility of the markets and what longer term trends have to tell us:
Economies, like stock markets, move in cycles, experiencing peaks and troughs while trending higher over time. The troughs can be challenging, but it's important to remember that they don't last forever. See our newsletter article on what this slowing economy means with respect to you invetments:
2008 will be going down as the worst year in recent memory for investors. However, we cautiously optimistic for 2009. We usually expect to see stock market returns improving well in advance of economic recovery. So while the economy may continue to be sluggish for some time and 2009 may be difficult for those seeking employment, we anticipate better returns for your investment accounts by late 2009. See our newsletter article for our summary on the markets for 2008, ScotiaMcLeod's outlook for 2009 and an interesting article from Capital International:
This month in the markets, the roller coaster ride continues with extreme market volatility around the world. Markets have been rising and falling by hundreds of points on a daily basis. At time of writing, the TSX is moving between 9,000 and 10,000. This volatility reflects our collective concern as a society for the short-term performance of the global and Canadian economies. See the following updates prepared for you by The Spiess McGlade Team:
The U.S. housing correction, which began as an issue with subprime mortgages, is now impacting the whole U.S. financial system and is trickling over into the Canadian and other markets. The credit crisis will continue to make markets challenging for the next while. The long term prospects, however, are still good. See the following articles prepared by ScotiaMcLeod for information on what is going on in the markets and what it means to you:
Fuel prices as high as they are and the U.S. housing market in crisis, clients have been asking us for our take on the issues. See our recent article from this month's Managed Money Reporter newsletter, for our insights:
The new year started with some of the wildest swings we have seen in a long time. Here is our January 2008 issue of the Managed Money Reporter newsletter, with more details:
We sent the following information to clients and discussed market volatility in our August newsletter. See:
Thankfully, the markets of the last two years have been on a nice recovery trend. While we still haven't regained the highs of 5 years ago, we are pleased that our advice in 2002 and 2003 to remain invested has been appropriate. This may even be a good time for clients to make their accounts a bit more conservative to lock in some recent gains. We will continue to review market conditions and advise in our regular emails to clients about any changes required.
The recent budget had little in the way of changes for individual investors. RRSP limits remain unchanged, and there are no new tax prepaid savings plans that had been mentioned in the past as a possible new investment vehicle.
RESP grants will be increasing for lower income families, and there will be new Canada Learning Bond also for lower income families. We will be reviewing those changes in a future issue of this newsletter. The Federal Government Budget site dealing with Education is at:
The income trust market will see some changes for pension plans and foreign investors, but the impacts on individual Canadian investors in income trusts are not terribly significant. For specific details on income trusts, link to:
As tensions rise and the war in Iraq develops, it is helpful to keep in mind how markets have behaved long term. Fidelity has a good graphic
The year started with 5 great trading days, and then 5 lousy days. Our January Issue has advice for this year's RRSP contributions, and your asset allocation.
The best article we have come across so far about the state of the markets: Battling a Bear by Frank Russell.
If you are in need of some good news, check out tax freedom day information. As of June 28th, your paycheques go to you, not the government.
For more reasons to be optimistic, check out this great brochure from Franklin Templeton outlining 5 Great Reasons to Invest in 2002 (.pdf 199k). Also available, is the follow-up brochure, 5 More Great Reasons to Invest in 2002 (.pdf 221k).
We are deeply saddened by the tragic events that unfolded in the United States on September 11th. Our deepest sympathy is extended to everyone affected by this terrible affront to freedom.
While we expect that the market volatility in the wake of these events may test the patience of investors, we still feel that a buy & hold strategy will prove the most prudent in the long run. We reported on the risks of cashing out in times like these in the October 2001 issue of the Managed Money Reporter. We have obtained market commentaries from the following sources that may help in assessing the situation:
We have again been experiencing a significant downturn in the markets worldwide. A table outlining past market corrections and their subsequent recoveries, (.pdf 13k) provides valuable insights. A chart of long term market performance provided by Fidelity shows the same information in a graphical format. Long term, markets have always gone up.
For more information about the value of a buy and hold philosophy, see Market Watch. It was less than 3 years ago that the Asian Flu and Y2K were predicting the end of the world. The next 1,000 point move, up or down, is anyone's guess, the next 10,000 point move will be up.
Trimark published an excellent article on technology stock hype and real values, which we reproduced in the March 2000 Managed Money Reporter.
Due to Y2K concerns, many felt that would be the start of a new bear market.
During the last bear market, editors of the Mutual Fund Reporter, sent out a letter with the October 1998 issue of the Mutual Fund Reporter recommending clients not try to time the market, but rather stick with a sound financial plan. This letter can be found by clicking here.
Due to inherent market volatility, we continue to
counsel investors to stick with their long-term investment plan.
ScotiaMcLeod published in 1998 a timeless document discussing Investment Strategies
for the Long Term. It is available as either a HTML
file or a .pdf file (145k).
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
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