Market Turmoil - August 2015 - Connecting the Dots

The markets around the world have been on a downward roll for the past week. What does it mean and have we thought about everything.

  1. RECENT Markets - It's time to reflect on what has happened in the previous 6 years. Did you know the Canadian market increased by 55% since 2008 which is an average of 9.2% per year.

  1. The last time the market was negative was in 2011. That year the Canadian market dropped 11%. Meaning the growth in markets from 2009 to the end of 2014 was actually 66% when the 2011 year was excluded. The 55% figure above included the 11% drop in 2011.

  1. Did you know the U.S. S&P500 Index has not had a negative year since 2008 to the end of 2014. The total growth was 90%. with an average annual rate of 15%.

  1. Do you know that normally the Markets have a negative year about every 4 years.

  1. Worldwide MACRO issues are at play. The three things that are having an impact right now are: CHINA, OIL and CURRENCIES.

  • CHINA: Major changes are going on in China and it's not just one thing.

  1. Their Middle Class have been playing in their less sophisticated stock markets and recent volatility has caused the Chinese government to try and intervene with Marginal success.

  2. The migration to cities caused an explosive growth in high rises in an attempt to meet that housing demand. That demand has begun to slow and is part of the reason demand for resources has started to decline.

  3. In recent years the average income for workers has begun to rise and their economy is shifting from a purely low-cost manufacturing on to more of a service based economy. This past year was the first time the Service part of their Economy accounted for a larger part of their GDP than manufacturing. Lower manufacturing means lower demand for resources.

  4. Did you know that China's Central Bank's current interest rate is 4.85% versus 0.5% for Canada and 0.25% in the US. Meaning they have a lot of room to assist in a resurgence of internal demand. I think their leadership has been on a learning curve as they plot the country's direction.

  5. CURRENCY: China has devalued their Yuan in an attempt to boost exports, NOTE: Canada has essentially done the same, although not in a direct way.

  6. Did you know that China's Shanghai Stock market rose 49% in 2014 and was up another 8% by Friday the 21st of August. Is it really a surprise that it went through a correction last week? Does 57% in a year and a half seem at all reasonable?

  • OIL: World production Is still high with OPEC, particularly Saudi Arabia, extracting more to grab market share at the expense of others, including Canada. OPEC, like Texas, simply drills a hole and gets oil at minimal cost. Canada's oil sands product is expensive by comparison. It's why Canadian companies are cutting back on production and future infrastructure projects. Add Iran to the equation and even more oil will be available to the marketplace. We can expect low prices for at least two years meaning the Canadian oil stocks will take a while to recover. As Oil represents 20%-25% of the Canadian Marketplace we need to look to Manufacturing to turn around our economy.

  • CURRENCIES: As China devalued its currency other smaller Asian countries have done the same trying to ensure their economy is not dealt a negative blow due to uncompetitive exchange rates. One could argue the US accomplished this though Quantitative easing, as did the UK. Canada's lower dollar is good for Exports. I would expect the Bank of Canada to lower our interest yet again in the near future.

  1. EUROPE: Did you know that Europe's Manufacturing and Services are on the rise despite what's happening in China. Did you also know that the Euro ZONE has a higher combined GDP than both China and the US individually, making it the largest GDP region in the world.

  2. Market Calls and Targeted Automatic System Selling prices: We have yet to hear anything about these two concepts. They played a big part in the 2008 Market downturn but have not been referenced hardly at all because people are focussed on the actual drops not on the reasons.

MARKETS are subject to emotional responses and not simply logic. The market is subject to large swings and then some modifying rebounds. We are seeing this happen as I type this memo. Parts of Europe jumped up 4% on Tuesday morning the 25th. Even the Dow Jones is up almost 4% early today.

One final thought: No where in this correction have we heard people discuss the modifying affect of Investment Diversification. Practically no one has all of their investments directly in any one Market. Many have balanced funds and other non market driven assets.

Balanced funds with their bond component will help reduce the affect of down market results.

We have been here before. Different reasons perhaps. History has proven time and again that Stock markets are the best performing class over the long haul. Be sure you are putting your long term perspectives on your investments. Remember your retirement will be for a long time and you will see bumps along the road.

This note was meant to give you a different interpretation than simply "the sky is falling" news. It means rational people with a solid long term direction should not be totally reactive to a short tem market drops.

If you would like to talk about any of these topics, please call or e-mail.

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