Monthly Archives: August 2011
“The Only Zen You Find on the Mountaintop is the Zen You Bring With You.” – Robert Pirsig
Bank of Canada Governor has Faith in Global Economy
The global economic upheaval is slowing growth in Canada, but Bank of Canada Governor Mark Carney doesn’t believe the country faces the prospect of the U.S. falling into recession. Carney told the House of Commons finance committee Friday that the U.S. is in the midst of its weakest recovery since the Great Depression, but he did not expect the world’s largest economy to shrink. “In response to uncertainties in Europe and the evidence of slowing global growth, equity and commodity prices have fallen significantly, and financial market volatility has increased markedly,” Carney said. “The spillovers to Canadian financial markets have been less pronounced but are still notable.” In its July monetary policy report, the central bank forecast the Canadian economy would grow 1.5 % cent in the second quarter, but the governor said Friday the bank now expects minimal growth or even a slight contraction in the economy in the quarter due to the global slowdown. “The considerable external headwinds that the bank has long identified are now blowing harder,” Carney said. “Relative to our prior expectations, we expect somewhat weaker economic momentum globally and, as a result, in Canada.” Mounting government debts in several European countries including Greece, Italy and Spain and the possibility that some could default on their payments, have been worrying global investors.
The testimony by Carney and Flaherty followed a report by Statistics Canada that the pace of inflation eased in July as increases in the price of gasoline slowed. The consumer price index rose at a annual pace of 2.7 % in July, down from a 3.1 % increase for June, giving the central bank room to keep interest rates at their exceptionally low levels, economists said. It was the first time that inflation has been below a pace of three per cent since February.
The TSX closed at 12007, down -535 points or -4.27% over the past week.
The DOW closed at 10818, down -451 points or -4.00% over the past week.
The S&P closed at 1124, down -55 points or -4.66% over the past week.
The Nasdaq closed at 2342, down -166 points or -6.62% over the past week.
Gold closed at 1847, up 101.00 points or 5.78% over the past week.
Oil closed at 82.64, down -2.75 points or -3.22% over the past week.
The CAD/USD closed at 1.0111, up 0.0016 points or 0.16% over the past week.
Sources: Bloomberg Canada, Bank of Canada, Statistics Canada, Investment Executive.
“The Art of Living is More Like Wrestling Than Dancing” – Marcus Aurelius
Another Topsy Turvy Week
We had some wild market gyrations this week. Despite some rough days and with the aid of some extraordinary days the markets finished the week very close to last week with the Dow Jones down just -1.54% and the TSX actually up by +3.12%. What were the causes of this? The volatility can be blamed on a number of factors including concerns about government debt in Europe and the United States. The decision by Standard & Poor’s to downgrade its credit rating on U.S. government debt certainly exacerbated the issue. Fears that the U.S. and other developed economies could be going into recession heightened the market volatility. Consider U.S. government bonds. Despite the credit rating downgrade, investors have been buying Treasuries and the U.S. dollar has been rising. Although the decline is reminiscent of the financial crisis of 2008, today’s conditions are vastly better than three years ago. Back in 2008, a number of financial institutions collapsed and the credit markets froze entirely, which contributed significantly to a recession, as many companies were unable to borrow to invest and conduct business. Today, in contrast, credit is available and corporations are flush with cash. Many banks and other companies have taken the last three years to strengthen their balance sheets.
In fact, corporate revenues and profits continue to grow. For the second quarter, 77% of the companies listed on the S&P 500 Index have reported earnings that were higher than expected, and their sales grew by an average of 12.5% over a year ago. There are other positives to keep in mind. Interest rates remain low and energy prices have fallen, both of which will support businesses and consumers. Employment levels continue to grow in Canada and the United States. Though the pace of economic expansion in developed countries is slowing, forecasters are still calling for positive growth this year. Relatively strong growth is also expected to continue in Asia and Latin America.
What does this means for us as investors? It is very difficult to sit through a downturn, especially with the financial crisis of 2008 still fresh in our minds. However, volatility is a normal part of investing. Historically, equity markets have eventually recovered and benefited investors who stayed the course. We saw this again three years ago, when the financial crisis was followed by a powerful rally in stocks in 2009. No one can say for certain when this latest period of volatility will end. However, history shows that markets eventually recover and that long-term investors are rewarded.
The TSX closed at 12542, up 380 points or 3.12% over the past week.
The DOW closed at 11269, down -176 points or -1.54% over the past week.
The S&P closed at 1179, down -20 points or -1.67% over the past week.
The Nasdaq closed at 2508, down -24 points or -0.95% over the past week.
Gold closed at 1746, up 83.00 points or 4.99% over the past week.
Oil closed at 85.39, down -0.81 points or -0.94% over the past week.
The CAD/USD closed at 1.0095, down -0.0097 points or -0.95% over the past week.
North American Markets closed up more than 400 points today or close to 4% after the Federal Reserve Board announced a firm commitment to keep interest rates low until mid-2013. This is a big relief following a wild day and large drops yesterday and last week.
This week’s descent is triggered by the Standard & Poors downgrade of the US credit rating from AAA to AA+. Two other credit rating agencies decided to keep the US rating to AAA. This was the first time since 1917 that the US credit rating was downgraded. The downgrade is controversial and thought to be unnecessary for a wealthy nation which can easily raise taxes to meet debt payments .
The markets reacted wildly yesterday. We are currently experiencing a crisis of confidence shown across the world. The European Central Bank stepped in and is reported to be buying back bonds from financially troubled Spain and Italy. A third round of Quantitative Easing (QE3) is expected from the US. These measures are put in place to help economies deal with the debt and confidence issues.
Is this bad for your investments? Yes, but only to a degree. These problems will not disappear or be fixed quickly. We are likely to see further wild days ahead and a slower recovery. A recession is possible but unlikely because of the positive indicators I have discussed in previous blog posts which remain true.
David Graham of CIBC World Markets said last week and I quote: “Please remember that while the governments (US and some Europe) are poor, the vast majority of companies are stockpiling cash. During the worst of the recession, they cut costs, diversified revenues and accumulated cash . Now most companies are in better shape than most governments. A Moody’s investor service report last week showed US non-financial companies sat on 1.2 trillion in cash and short term liquid investments at the end of 2010. The total has only grown since. But it’s not just the balance sheet strength. The earnings season tech darling Apple Inc and Intel Corp blew past analysts’ expectations and big consumers names like Coca-Cola and MacDonald’s continue to grow rapidly. The S&P 500’s forward earning yield which is the reverse of price earning ratio is 9%. that means that the earning per share are expected to be about 9 % of the share price, a hefty return considering that US Treasuries return next to nothing. Yet investors continue to shed stocks, even if the alternative is 2% on GICs.”
Canadian financials, which have strong balance sheets and are considered defensive stocks, are currently yielding between 3.5% and 4.8%. On the US side, 22 of the top 30 Dow stocks pay a dividend yield better than the 10 year US Treasury.
Markets are overreacting based on fear, not facts. Don’t get caught up in the irrational frenzy. Stay calm and read the following especially, “The do’s and don’t for investors in the market” article.