Jordan Wealth Management Group - ScotiaMcLeod Truro

So is this a replay of 2008?

Today (and this year so far) has been tough to be an equity investor. I have had more than one client say to me of late, "yes, I can take another decline, I know the markets always come back, but I don't know if I can take another 2008".

I do not believe this correction will be a repeat. Market moves have never mirrored the immediate past moves, and the reasons are always different; so why should this time be different? That being said, I will remind you that it is, and always will be about confidence, or lack thereof. Do you have confidence that your power or phone company etc will still be here a few years from now gouging you for the benefit of their shareholders? I do. Others may not if they are talking about what the price of a barrel of oil will cost next year and what will be the profits of the related oil companies in that business. That's what makes a market - no one truely knows for sure, so you invest where you are comfortable.

I am providing a synopsis of some personal and corporate viewpoints for you to consider as we go through the next few weeks/months:

Positive

•        Don’t be surprised to see China appear as the buyer of last resort of European debt – with their vast currency reserves and current account surplus, it is in their best interests to have an alternative to just the US dollar as a place to invest.

•        Most of the positive factors which supported equity prices during the rally between August, 2010 and this past April are still relevant, if not more relevant today as evidenced by another solid quarterly earnings season. 

•        Equities appear attractively priced in the context of still increasing profitability, cash-rich corporate balance sheets, growing dividends, and continued emerging market strength which should continue to support demand growth for commodities. 

•        Equities have been trading within a range-bound market over the past two years, and with the recent sell-off, we believe we are near the bottom end of that range.

•       Current weakening global economic conditions and geopolitical circumstances suggest interest rates will remain lower for longer.  Expectations for rate increases by the Bank of Canada and the U.S. Federal Reserve continue to be pushed out into 2012.  Low interest rates are supportive for equities.

•        Beyond an inevitable relief rally in equities, the catalyst for a more sustained rebound in equities is not clear; however, we have felt for some time that the Fed would not likely remain idle indefinitely and that further stimulative monetary policy action is to be expected.  QE3 is a real possibility.

•        Heading into a U.S. election cycle, political bias suggests further fiscal and monetary policy stimulus in the near term; indeed, President Obama discussed infrastructure stimulus measures in his first speech following the signing of legislation to increase the debt-ceiling.

•        Longer term, you want to own anything China needs to import. Themes will be agriculture, energy, water (China’s water table dropping 3 meters a year). This will be good for Canada’s exports.

•        The current decline in stock prices represents a buying opportunity for equity investors who can look out a few years or more.

Negative

•        Equity market sentiment has deteriorated over the past two weeks, and the downward spiral accelerated with the recent conclusion of the U.S. debt-ceiling controversy as investors re-focused their attention on other global economic factors.

•        Renewed concerns regarding euro-zone sovereign debt, (Italy is the flavour of this week), are also weighing on capital markets with Spanish and Italian 10-year bond yields trading above 6%.

•        The risk of a credit rating downgrade of U.S. debt is very real, but may already be mostly reflected in equity market valuations.

•        Markets are working through an adjustment phase to reflect a somewhat lower economic growth outlook.  Unfortunately, any valid solution to the debt and deficit problems faced by Europe and the U.S. will be a further drag on growth for an extended period.  In the U.S., jobs and housing data are expected to remain weak for several years.

•        China will be a big swing vote as to the future health of our economies and markets – they are slowing down growth while trying to contain inflation but still keep their populace working and reasonably content. They are using some pretty aggressive/creative and possibly corrupt reporting to backstop loans and growth and this could be a big issue down the road.

Neutral

•        Trading volumes have increased over the last several days and the sell-off has been exacerbated by on-stop orders, margin calls, and other program trades. While we have yet to see true market capitulation (and we may not), we believe that the potential market return is beginning to modestly outweigh the risks at current levels.

•       Our outlook is tempered somewhat by recent economic releases indicating the second half rebound might be more muted than previously thought, (although we should still see some rebound in economic activity from the temporary slow down caused by the Japan earthquake earlier this year); however, our intermediate and longer term bias still favours equities over all other asset classes.

•         Although share prices may remain range bound for several months, investors in diversified portfolios should be looking to selectively add equity exposure.  In addition to commodity cyclicals that are expected to outperform in the event the economic outlook improves in the second half of 2011, investors should also add to defensive, dividend paying stocks to counter ongoing equity volatility and enhance total returns.

Please call me at 896-7740 if you want to discuss what to do for your individual circumstances. All the best, Ted