Jordan Wealth Management Group - ScotiaMcLeod Truro

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2009 in review and 2010 outlook

December 31, 2009

The decade of 2000-2009 is one I am happy to see gone as an investor – our Canadian stock market is closing out the year at about the same level it was in August 2000!

In the more immediate past, 2009 was one of those years that reminded us what a roller coaster the stock market can be – and also of the dangers of conventional thinking.

After the collapse in global financial markets in the fall of 2008 and the resulting pounding taken by stock markets around the world, the consensus in January was that the worst was behind us. That was a sharp reminder of the danger of conventional thinking – by early March, markets in Canada had declined by a further 15% and the U.S. was down by 25%.

At that point, the consensus shifted and there was growing sentiment that we might be entering a long period of economic stagnation; that’s when we heard respected economic forecasters talk about a one in five chance of another depression. It was precisely at this point that the coordinated stimulus spending by governments around the world finally had an impact and we began seeing signs of an economic recovery. From the market’s bottom on March 9 to the end of November, global markets were up by 50% to 65%.

Thus, 2009 was a sharp reminder that it’s impossible to predict short-term market movements. Another lesson is that the one constant will always be that of CHANGE – the differences that none of us can identify before it happens – Who knew the changes in store for us twenty some years ago when Bill Gates was working out of his garage?

What we do know:

China cannot be ignored – it’s economic power and effects on our Canadian market will grow over time. Canada’s market is 50% based on commodities, and the marginal price of commodities is being set by China – thus their growth and policies will have a strong effect on our market. Twenty years ago Emerging Markets represented 1.5% of the world’s stock market capitalization, and Japan was 40%. Today, Emerging Markets are 12.3% and Japan is 9%.

The U.S. is still the world’s biggest economy and faces some serious unknowns in the next few years. The 'old news' that everyone knows today is that Consumer bankruptcies are at record levels and families are increasing their savings and focusing on paying down their debts instead of spending like they used to, unemployment is over 10%, and housing prices are now at longer-term trend line prices. Leading economic indicators are largely positive and almost without fail signal the end of a recession (this is true of almost all the top 40 economies around the globe).

What we are waiting to see:

1. Will we struggle to see economic improvements from here that are not government stimulus-induced. Likely so.

2. Will we have inflation, higher taxes and interest rates as a result of all this government spending – how much and how soon? The popular consensus is that rates will stay low for at least another 6-12 months – as the weak economies still need it, and there is weak demand to cause price increases. Taxes are expected to rise and to be a drag on economic growth in the future.

3. Stock market prices are set by the earnings that companies can make, the interest rate environment (cost of capital), and valuations (what people are willing to pay). Consensus is that earnings will surprise to the upside because some economic growth is expected , and a small increase in sequential revenue will be magnified by operations that have undergone massive cost-cutting to their operations in the past few years. Valuations are thought to be a bit high, but that earnings improvements will cause this to catch up. Keep an eye on 10 year US bond rates – currently at 3.85% (signals what foreigners want to lend money to the U.S.). If this rate goes much above 4.0 to 4.5%, it may not be good for equities.

4. Central banks actions over an exit strategy from all this stimulus is the wild card as to whether we see a gradual improvement; or another leg down.

The right approach for your portfolio:

While my team and I spend a great deal of time focusing on the big picture, the most important issue is how we adapt that view to each client’s individual portfolio.

For older clients, we have always been believers in maintaining conservative, balanced portfolios – that stance protected our retired clients from the worst of the decline in 2008 and early this year. Today, we are focusing on higher quality stocks and funds, as we believe that these will provide the best risk return trade-off going forward.

Noted British historian Paul Johnson has written that at every given point in time, you can always point to good news and bad news – the only difference is the balance between the two and what the media pays attention to.

Warren Buffet has said: “when investing, pessimism is your friend, and euphoria is the enemy”.

I personally would prefer to be cautiously optimistic, and it is in that frame of mind I am entering 2010 with. While stocks are not as cheap as they were in March, by historical standards they do offer reasonable value.

We look forward to continuing to work with you in 2010 to ensure you have the portfolio that is right for you – and thank you again for the opportunity to work with you over the past while.

As always, my team and I are always available to talk about any questions that you might have.

In the meantime, wishing you all a healthy and wealthy New Year!

Ted