The Global economy is currently experiencing a slowdown caused by a number of factors. There is a lot of doom and gloom talk out there, fear and uncertainties. We believe that this downturn is temporary and the recovery will pick up again in the later part of this year.  Here are a few reasons we stay optimistic in the midst of so much negative talk.
 
The current economic environment looks a lot more like a mid-cycle slowdown than a pre double dip recession.  Typical indicators preceding recessions are not currently showing. 
 
Here are 4 great predicators of recessions.  These leading indicators accurately predicted past recessions.
 
  1. Yield curve: This is the ratio between the 10 year versus 3 month treasury bond rate.  It is currently at 2.9%. The average is 1.45% and 6 months before a recession it is inverted or negative at about -.8%.  So, this leading indicator is not pointing to a recession at all.
  2. Real Rate:  This is the ratio between the 3 month saving rate versus Inflation (CPI) which shows whether the saving rate is greater than inflation.  Currently it is at -1.3%.  The average is +1.3% and 6 month before a recession it is at +2.5%.  Therefore, this indicator too does not point to an approaching recession.
  3. Excess inventory: Currently, inventory level are very low at -14%.  The average is zero and 6 month prior to a recession it is at about +3%. So, this indicator would actually point to a bullish scenario.
  4. US composite leading indicator is currently at +3.5%.  The average is at about 1.3% and 6 months prior a recession at -1.2%.
Of course, these can change but it is fair to state that we do  not have evidence of a near recession at all.  These indicators point to a recovery. Having said that, it appears that we are currently in a mid-cycle slowdown.  It actually looks a lot like in the late 70s and 80s immediately preceding the incredible market recovery from 85 to 1991.
 
Please bear in mind that:
  • the average recovery lasts 32 quarters or about 8 years.  We are only 6 quarters in this recovery.
  • it is the price multiple growth rate of a stock that is the best indicator of its value not its P/E ratio.  The multiple growth currently is very attractive.
  • the valuations are incredibly cheap now after the past 2 months pull back.
  • Typically, equity move sideways from May to September.
Having said this, we can’t ignore the following facts:
 
  • the Sovereign debt crisis is an issue in Europe over the mid-term
  • China’s high inflation and rise in interest rates to control it is a smart move but will temper demand, especially for commodities which will affect Canada greatly in the short-term
  • the US economy, heavily dependant on consumer spending, will continue to experience slower growth due to a shift from spending to saving until home equity is restored which will take time.
  • this major events will affect markets in the short-term to the mid-term.  Long-term trends point to growth from the expansion of Emerging Markets. 
This is why, portfolio management is so important.  Picking managers who can successfully manage defensively and preserve capital through turbulent times as well as position the portfolio to capture growth trends is key.  Please keep in mind also that to benefit and hedge your profits you can take advantage of these types of low point we are going this summer and periodically, by making an investment if you can. 
 
 
“The most common cause of low prices is pessimism – some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.” ~ Warren Buffet
 
Never hesitate to contact Terry, Anthony or myself if any questions or concerns about your portfolio or your plan.