Jordan Wealth Management Group - ScotiaMcLeod Truro

Since the last time…

We’ve had a number of open orders to buy kick in over the past month as markets around the world finally decided to have a decline and make companies more affordable for those willing to wait. As expected, the emotional swings from greed to fear have been strong and swift – and some days leave me shaking my head in wonder. There seem to be fewer and fewer Warren Buffets out there lately that want to invest in good companies, and more kids sitting at trading desks where they are paid to day trade all day long for hopeful profits of a penny a share or less.

At time of writing, our Canadian stock market is down about five percent from its most recent high in April, and did come close to being down ten percent a few days ago. You could sense panic coming back in to people’s voices – even though this last move down just took us back to where we were 3 months ago in February.

It is times like this that you need to remind yourself that markets never go in a straight line – neither down nor up. And don’t get fooled into looking at just the last few years market moves and assume that pattern will repeat itself – it never does. Instead, bring up a 20 year chart of our market – THAT chart shows something you should expect to continue – it moves up from the lower left to the upper right – inexorably higher – with many swings, big and small along the way.

The fears of the last month have focused around the continuing saga of Europe’s hard few years ahead, and massive 

currency and market swings. This will pass, but not right away. "Volatility", or big moves up and down in short periods is here to stay for a while I am afraid. The best advice I can give is to not panic, and hold the belief that when our markets take another big hit, they will then recover, like they have every other time.

Have the belief that Europe and the US can take the hard to stomach actions to reduce their spending and get their debt under control - the same that we in Canada have done before. We may not like it, but we will do it again to the extent that we have to. If we can do it, so can they. It was not that long ago that Canada was threatened with "banana republic" status because of the level of our debts. Our governments and many corporations subsequently cleaned up their balance sheets and paid down debt in the mid 90’s. They had little choice. It certainly didn’t hurt as well that the incremental demand for our country’s commodities over the past number of years helped keep us in jobs and bringing in tax revenues.

The future for Canada still looks bright – current worldwide economic fears aside, our country is not highly levered, and the world will continue to need our resources. There will be period where resource demand waxes and wanes, but it will always be there just the same. We will be seeing our provinces rolling over and issuing new debt in the coming year or two to pay for the stimulus spending we wanted to avoid the worse of the recession; but they will be cutting back on spending from here on as well. And just maybe, our country will "get it’ when it comes to the need for increased innovation to secure a long-term future. The Feds creating nineteen new research chairs at our universities looks like a good signal.

We also have the benefit and curse that Canada has become a safe haven against global sovereign debt worries. This is a benefit because increased foreign demand for our dollar and dollar denominated assets increases their value (higher stock markets, less pressure on interest rates to rise). The curse is that a higher Canadian dollar makes it harder for our manufacturing companies to compete – but we had it too good for too long; time to find better ways to make a profit.

What else? Gold is still popular as protection. Some Canadian cities are in a housing price bubble that needs to burst. There are a big bunch of US houses that will be hitting the foreclosure markets between this August and next April. We will see higher interest rates – but this is a good thing – it means things are looking up enough that we are taking early action to make sure inflation later on does not get out of hand.

World economic growth basically comes from three areas – consumer spending, business spending and government spending. We know that the consumer has been weakened through job losses and from the negative wealth effect in the US from housing prices in particular. While there are some recent signs of improvement (annual spring fever), the consumer will likely have a neutral effect in the developed markets for the foreseeable future. The hope is that within a few years, there will be additional consumer demand coming from the populations of the emerging markets. Corporations have been increasing their spending of late after having drawn down their inventories and delaying technology improvements for years after Y2K. Corporate profitability of late has been improving, so corporate spending should be counted on for some, albeit lower positive contribution. Government spending has been a significant driver of growth particularly in China, which is near the end of its stimulus package. The bulk of US stimulus spending is occurring this year in the States. In the meantime, we have governments around the world wanting to competitively devalue their currencies to make their exports more attractive, while on the other hand needing to reign in spending so that their borrowing costs do not rise too much – but this can strengthen their currency. Bottom line here is that we should expect a slower level of growth over the next few years. BUT. Slow and steady would be a nice reprieve from boom and bust, would it not?