August 2011

The stock market: where are we at?

What a summer! It felt almost like the summer of 2008, when the stock market took a dive that lasted until March of the following year. Almost - but not quite.

August had a big welcome in store for everyone coming back from summer holidays: it's been awhile since we saw the market drop so sharply for so many consecutive days. In fact, after rising to over 14,000 points last spring, the Canadian equity market's S&P/TSX index closed at about 11,600 points at the end of the ill-fated week of August 8. Since then, it's been a yoyo. But if you think we might be reliving the summer of 2008, think again: we're actually living through its aftermath.

A little perspective

A decline of 15% is nothing to sneeze at, and could be quite painful for some people, especially those who were planning to withdraw money from their portfolios for retirement. But we can be relieved to note that we are still far short of the 50%-or-so drop of three years ago. In fact, at this writing, the Canadian index is back at its level from the fall of 2008... and 2006. In other words, if we exclude dividends, the stock market hasn't really advanced in five years - but it's no worse off, either.

There's no telling whether the downward pressure will abate anytime soon. The rule in such circumstances is simple: don't give in to panic, don't sell off your depreciated assets, and do stick to your strategy. Everyone has their own tolerance level for volatility, however, and this depends on a number of factors, notably the investment horizon involved. If you think that you've reached your own tolerance threshold, meet with your financial services professional to make sure that your investor profile is still appropriate for your situation.

Lingering concerns

It could be that the crisis of 2008 will be with us for some time yet. The fears from that time seem to have morphed instead of completely dissipating:

In 2008, U.S. household debt and its impact on financial institutions was front and centre; today, the big concern is government debt - not only the debt of some European countries, but that of the United States, too, recently downgraded by Standard and Poor's. Now that we've bailed out the banks, it looks like we also have to bail out some governments.

the strength of the global financial system
Indeed, some people are questioning whether the banks themselves, especially European banks, are completely out of trouble. The European banks are starting to think twice about lending to each other (just like in 2008) and monetary funds are reducing their exposure to the banks' debt securities. In 2008, it took almost a year to stabilize this kind of situation.

the possibility of a double-dip recession
The U.S. economy, still the driver of the global economy, is spluttering back to life, but the recovery hasn't really taken hold yet. Some observers still fear a fall back into recession.

Reassuring factors

On the other hand, we have to admit that things have improved in the past three years: the situation in the United States is incomparably more stable, the government bonds from a number of countries are still very solid, corporate profits are there, and stock valuations are reasonable. It is likely that once the markets take stock of these factors, we will begin to see more stability.

Meanwhile, we can be happy that Canada continues to set a good example in terms of debt management and that our economy, on the whole, has come through relatively unscathed. But you still have to be careful: keep in mind that the Canadian equity market is highly concentrated in a small number of sectors, particularly financial and energy corporations. If you want to diversify your portfolio by adding technology, health care, or “defensive” sectors (in case of a recession) such as consumer staples, you'll have to look abroad. It's true that foreign funds have been eclipsed by Canadian ones over the past 10 years, but don't forget that if the crisis is global... so are the opportunities.

Talk it over

In the kind of environment now prevailing, the important point is to keep things in perspective and come back to the basic principles of investing. That's why you shouldn't hesitate to contact your financial services professional for an update!