I must admit, it is pretty deflating to look at our investment statements these days. It would be tempting to react, trying to mitigate the effect of the uncertainty Greece is creating. Please take the time to read this commentary before getting caught up in the emotion of it all.
What is happening now?
Just as the economic backdrop seemed to be improving, the European financial crisis is once again showing its ugly head. The growing likelihood of a Greek exit from the Euro zone and mounting political uncertainty across Europe weighs on Global financial markets. There is increasing risk that the EU/IMF bailout program will be terminated, potentially precipitating a Greek exit from the euro zone. Results of the French and Greek elections suggest disbelief that austerity is the solution to Europe’s fiscal woes.
Interestingly enough, the economic news is not all that bad. In fact, reports continue to come in showing positive economic data for Canada and the US especially.
Last week’s positive trade report served up as a reminder that Canada’s exposure to Europe is largely indirect. Canada’s trade prospects hinge more on U.S. developments. Most importantly, the Canadian labour market showed vigour through April, with an impressive 58,000 new jobs created.
TD Bank economists write in the “Bottom Line” report , May 18, 2012 : “In the United States, job creation may have weakened in the last few months, but the grounds for sustaining stronger employment growth are more fertile now than have been since the economic recovery began. U.S. corporations are more profitable and liquid than they have ever been. At some point some of these funds will be unleashed towards new investment, creating a positive feedback loop to more jobs creation and corporate growth.”
Sales of new US homes increased last month as the real-estate market continues a slow ascent back to good health. Sales of existing homes rose 3.4% in April and distressed activity tapered off as the slow housing market recovery took further root. The National Association of Realtors said Tuesday that sales rose to a seasonally adjusted annualized rate of 4.62 million, from a downwardly revised 4.47 million in March. All four regions saw improvement, and compared to April 2011, sales rose 10%, the tenth straight month of year-on-year gains.
U.S. President Barack Obama and other leaders of the Group of Eight industrial countries expressed hope Saturday at the G8 summit. The leaders agreed that Europe’s financial crisis must be addressed with a mix of growth and austerity measures. At the start of a leaders’ summit, markets were prepared for the worse – that the euro zone would essential cut Greece loose. The tone switched quickly, though, with leaders maintaining that they want Greece to remain in the euro zone –at the same time that they work toward implementing measures to contain any messy fallout from a Greek withdrawal.
The direction the debate has taken recently should give us confidence. Europe has taken steps to manage the crisis. Individual countries and the European Union as a whole have engaged in significant reforms that will increase the prospects of long-term growth.
In the meantime, it would be very tempting to react and make changes to attempt to avoid further losses and go back later when things would start to improve again. The problem with this strategy is that it is impossible to time and successfully guess where the market is going. It would be a mistake to react and make changes now based on how we feel, based on emotions, rather than facts.
The facts are that what is happening has nothing to do with the merit of your investments. It is all based on the uncertainty created by Europe. Markets react this way to uncertainty. If it was not for Greece, the recovery started earlier this year would continue.
When confidence is restored, and believe me, it will eventually, when Europe gets its act together, a serious plan is outlined, all parties approved, markets will start refocusing on the data and corporate earnings, and markets will rally again. That is just the way it is. Look back at the drops in 2008 and the recovery the following year. Reacting in 2008 would have been a mistake. I could go back 100 years of history which would show the exact same pattern. Markets fluctuate that is just the way it is and it is best to stay away from that.
Portfolios we recommend are all made up of large companies including the Canadian Banks, Consumer staples, Pharmaceutical companies, and other defensive sectors. This is what you own. Excellent companies paying a high level of dividends because their earnings are high, stable and growing. They have absolutely nothing to do with Greece, yet, their share price also fell in the past few weeks.
If you have money to invest for the long-term, I would even say to buy and benefit from the opportunities this market created.
We bought smart, now it is time to hold strong. That is the best advice we can possibly give you.