Market Update - October 2014
Before reviewing why the markets have been so jittery lately, let's remind ourselves that the markets have performed very well up to this point. The Canadian Market was up almost 15% YTD at its high point in early September.
The US was up almost 9% at the same point in time.
So what has happened?
The catalyst was Germany.
As you probably know, Germany is the Industrial Powerhouse of the European Union (EU) and has the 4thlargest GDP in the world.
When it was noted their production was down this sent a negative feeling about whether the EU was truly recovering or not.
This, when factored with recent news about whether China was doing well or not, coupled with Ebola issues,Middle East political turmoil and of course Russia / Ukraine all compounded into this downward market trend.
As with many market adjustments they are usually followed by a rebound. This time was no different.
The Canadian Market dropped from a 14% gain in mid September to a 2% gain by Mid October.
Since the 15th of October it has risen to a 7% Gain YTD.
What this tells us is when markets go through a minor correction they usually over correct and then buyers jump in to bring back the truer value of the stocks.
Emotion and automation are often the big drivers in market performance, regardless of what economic modelling is used by Fund Investment Managers.
You may remember that automated Stock buying and selling often means short term volatility. This refers to 'set' prices that are used in computerized systems.
Clients will often set a buy value or a sell value on individual stocks. Once these numbers are reached the system takes over and it starts a spiral activity which leads to other automatic selling.
Investment managers are more selective in their strategies and usually have a longer term horizon.
They too have buy and sell prices and when Individual downward spiralling begins they and other individual buyers will jump in and it helps reverse the trend.
Most investors are in specific funds for the longer term.These market bumps are disconcerting only in the short term.
The key as always is to ensure you have reviewed your Investor Profile in the last few years.
If you are comfortable with your Profile and the related funds selection then you should be in good shape over the long haul.
If you have not reviewed your Investor Profile recently then let us know and we'll send you a questionnaire to complete.
Points to consider:
Can China sustain an annual GDP growth rate of 10% forever? No, of course not. It has been on an economic tear for 2 decades with annual growth rates of 10% or more each year. So let's do the math. A 10% growth rate for 20 years would mean their economy would be almost 7 times greater in size than when they started. To expect this trend to continue seems inconceivable.
China is looking inwards as their populations' prosperity has grown. Their salaries have grown 200% to be three times what they were a decade ago. Their real estate market has boomed due to a massive migration to the cities. This kind of people transition is not without its challenges and the need for raw materials was huge in order to sustain this building growth. The number of cities in China that had 1 Million people or more in the last decade has grown from 30 to 112. By comparison in Canada we had 3 cities ten years ago (Montreal, Toronto & Vancouver) and have added one since then, Calgary.
Russia has been dramatically impacted by sanctions and its Market is down 28% this year YTD. Plus oil prices are down to $80 from a high of $104, a 24% drop. Russia also relies heavily on Oil and Gas revenues to sustain its national budget. Russia is suffering but it has not yet seen the complete impact of this sustained effort.
The Germany and European Union is important to the world as collectively their combined economies are greater than the US. So we all need a strong European Union. It's difficult for the EU to implement Quantitative Easing because it requires all the EU Members to agree. The US and Japan were able to introduce similar QE policies because they are individual countries making a National decision.Europe will continue to have issues going forward and we'll need to watch what the European Central Bank can accomplish in terms of Quantitative Easing and overall control of all the banks inside the EU.
France is really the country to watch. Its high social safety net costs and disproportionate civil service will combine to see more difficult times ahead for the world's 5th largest economy.
It's worth noting that GOLD is often used as an inflation hedge and a safe place when markets get volatile. It's interesting to see GOLD has not moved at all recently and currently sits at approximately $1,225.00 per oz.. In 2009 it rose to almost $1,800.00.
The US economy continues to do well. Unemployment is at its lowest level in 11 years. Consumer confidence continues to rise. The housing market continues its slow rise and auto sales are expected to be the highest in history. The US Dollar's increase in value is due to a safe currency mindset and its strong economy.
Oil Prices have declined amid lower demand and higher supply. Although this is bad for energy producers, Commercial and Personal Consumers will reap the benefits. This is expected to boost overall economic activity.
Canada will ride on the coattails of the US Economy's growth. So despite lower oil and gas revenues our lower dollar should help raise Canadian exports.
The Canadian Economy is expected to grow by around 2 percent this year and 2.5% next year while the US is expected to grow 2.5% this year and 3% next year. NOTE: A GDP figure in the high 2% range to 3% is considered good for any developed economy.
As you know these rates have been low for years now and there is no expectation they will be changing any time soon.
The Bank of Canada and similar National Banks like the Federal Reserve in the US adjust interest rates as a means to stimulate or contract growth in an economy.
The intent of low interest rates is to encourage people and corporations to buy or build. High interest rates will discourage that.
We have been in a time of low rates because the world has been slow to recover overall.
I don't see anything on the horizon that will change this unless inflation starts to creep past 2%.
I feel Mortgage rates will remain low in the foreseeable future as will GIC rates.
It's usually difficult to find a financial institution with interest rates in excess of 2% for a Five Year GIC and these are usually Non-Redeemable.
This is why so many clients have opted for High Interest Savings as a short term strategy.
Since 2008 the Canadian market has grown on average 9%+ per year (excluding dividends) even with the recent downturn factored in.
We still remain in good shape going forward but as always we need to ensure your Investor Profile is right for you.
Remember, not all of your investments are in Equities and normally not all of your equities are in Canada. All of these help buffer market swings.
Keep in mind we've weathered the following in the last 6 years: Mortgage Backed Securities, Greece; Cyprus, Ireland; Spain and Italy, Quantitative Easing in the US and Japan, just to name a few.
In the end it's not surprising we have seen a little turmoil in 2014.
If you would like to meet and review your investments then please let me know.
Please feel free to share this with others.