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Well, it's been 6 long months of declines in our stock markets. Here’s what we are thinking right now...
· News flow out of Europe and the U.S. has made for an increasingly challenging investment environment, and makes us more cautious toward the near term outlook
· North American equity markets tumbled lower today following yesterday’s negative response to the comments and actions by the Federal Reserve. The so called “twist” operation was received negatively by investors as their plan to push down long term interest rates and flatten the yield curve is an indicator of weak growth and/or recession.
· The Fed’s reference to "significant downside risks to the economic outlook” also drove the market lower.
· Further negative commentary out of Europe continues to weigh on capital markets as French banks are under significant selling pressure and investors look for action by the EU, ECB, and IMF to resolve the financial crisis through an orderly default by Greece.
· The outlook for a prolonged period of low interest rates, at both the long and short end of the yield curve, has had a particularly negative impact on the financial sector, both banks and life insurance companies, which represent almost 30% of the Canadian equity market.
· Market sentiment softened further on weak PMI data out of China overnight indicating a manufacturing slowdown and slowing economic growth in that country.
· The weakness in stocks has been exacerbated by program trades which have kicked in and accelerated the downside moves.
· Individual stock or company fundamentals are irrelevant in the current market context as the market’s direction is largely being dictated by events in Europe. Everything rests with getting some resolution to the debt crisis in Europe and it appears that the market is forcing equities lower to push the EU and ECB into action sooner rather than later.
· Subject to there being no further policy mis-steps in Europe or the U.S., from a technical perspective, there is the potential for another 5-10% downside risk in major stock indices before reaching their next support levels. If the market holds the 200 week moving average on the Dow Jones Industrial Average, it could serve as a positive indicator.
· Market volatility will continue and investors are encouraged to review the asset mix in their portfolios to ensure it appropriately reflects their risk tolerance.
· Despite the low returns provided through holding cash, it can still be a component in balanced portfolios.
· Equity valuations appear attractive and current events will ultimately lead to an excellent buying opportunity, but in the near term macro issues will continue to be the primary determinant of equity market direction.
. Market bottoms usually need a day or period of capitulation selling, where someone says - I can't take this any more, sell everything. That's usually the time we have seen the worse of it - we just don't know it until later. Hopefully that time is upon us; and we will look back at this like other times and be saying "why didn't I buy then?". In the meantime; try to focus on the actual businesses you own a share of, not the market overall. Look at each company and ask yourself, am I comfortable that they will survive this latest recession and come out the other side, and keep on paying me their dividends while we wait? If you can't say that, please call me to discuss. Ted
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