Financial Planning, Investment Counselling, Tax and Accounting

Contents

Market update

Market update

The doom and gloom

The growing global financial crisis and rising fear of a global recession has spread doom and gloom into the global equity markets resulting in dramatic declines in shares prices around the world.  Simply put, we are now in a bear market, which is a market driven more by panic and fear than by economic fundamentals.  Investors are bolting for the exit doors in a panic driven sell-off, adding fuel to the fire-sale of equity assets.

However, as with most dramatic events, it is important to keep things in perspective.  First, understand that the sky is not falling, and we are not headed for another Great Depression.  Stock brokers and senior financial executives are not jumping out of their office windows, although perhaps to the dismay of some of their clients.   The stock market has experienced a significant correction, and this is very uncomfortable for individual investors.   However the market will recover.  This will take some time, and the road to recovery will be bumpy.   But one thing is certain – the stock market will recover.

Warren Buffett has termed the current situation as “an economic Pearl Harbor”.   More importantly, last week Warren Buffett moved a couple of billion dollars out of cash in order to invest in some battered US companies.   Obviously all is not lost.

The Canadian perspective

Canada’s financial institutions and our system of regulatory oversight are models for the rest of the world.  Although not immune to the global financial crisis, Canadian financial institutions are in no way at risk of financial failure.  In fact the reverse is quite true as Canadian financial institutions will take advantage of the current situation to buy up some high quality assets in other parts of the world.

The Canadian stock market is made up in large part of companies that operate in the resource and commodities sectors including oil and gas, forest products, and mineral extraction.  The Canadian stock market has been adversely affected not only by the global financial crisis, but also by a significant decline in commodity prices as a result of falling demand.  The price of oil is a good example.  Oil peaked at US $147 per barrel in the month of July.  Oil is today trading at around US $95 per barrel – a price decline of 35%.

However, once the financial crisis abates, and the global economy picks up, demand for commodities will increase, as will prices, and Canada’s commodity intense stock market will rally once again.

The silver lining

Few investors relish the experience associated with a bear market.  However, in many cases the significant market decline represents a rare opportunity to purchase high quality investments at a significant discount.  And this is not empty rhetoric.  If you can accept the simple reality that the markets will recover, then it is only logical to recognize that the current market represents a great opportunity.

Believe it or not, a bear market can actually help most investors build wealth.  Take our last bear market for example (2000-2002).  The market plunged a harrowing 44%. It was a nightmare for many. 

However for those patient investors who stuck to the fundamentals of their asset allocations and rebalanced their portfolios even as the markets were in decline, the bear market proved to be a very rewarding experience.

In late 2002 the markets recovered, and then went on to rally for the next 5 years resulting in a gain of 133%.

 Investors with asset allocations that have been carefully plotted according to their risk-tolerance profile must resist the urge to sell at any price or to shift assets to cash. Now is not the time to panic.  Now is the time to stick to your asset allocation, rebalance your portfolio, and take advantage of the opportunity that this bear market has created.