“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.