On August 31, 2009 the Recession Ends
Financial advisors have access to a number of various macroeconomic financial forecasts from a variety of investment managers and economists. A lot of material unfortunately, cannot be given directly to clients due to copyright or regulatory issues.
However, I have found a really great resource in the public domain that I would like to share with my readers. It is the monthly economic and market comments by Dr. Martin Murenbeeld and his colleague, Bill Tharp. It can be found here.
Entirely readable and with lots of charts, these market summaries focuses on economic and financial trends in Canada and the US. Highly recommended.
Of particular interest to us is Dr. Murenbeeld’s contention in a recent commentary that the stock market low was reached on March 9th and that the end of the U.S. recession will be this summer by August 31st!
So, make sure you pencil in that date on your calendar and remember you heard it here first.
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For the technical “chartists” out there, June 2nd 2009 was a watershed moment as the S&P 500 Index crossed the 200 day moving average triggering a BUY signal.
As mentioned in a previous newsletter, the S&P 500 index is a broad based measure of the whole U.S. stock market so a BUY signal is a significant event. Before we pop the champagne corks we should also be aware that more than half of these BUY signals don’t turn out and the market sells off. A much better signal for gauging momentum and trend is the 12 month simple moving average which hasn’t issued any confirmation signals yet. As an experiment, we’ll follow these two technical indicators in future newsletters and see what if anything, they can portend about the future.
UPDATE: June 22, 2009, the 200 day moving average has moved below the index level triggering a SELL signal. Two days later on June 24, 2009, the 200 day moving average has moved above the index level triggering a BUY signal.
The above BUY, SELL and then BUY signal is called a whipsaw - an inflection point(s) that results in a rapid reversal of BUY or SELL signals. These rapid reversals are not good as we are looking for long term momentum indicators. Therefore, the 200 day moving average fails our test.
Next, we try tracking a longer term moving average - the 12 month moving average which hasn't indicated any BUY signals.
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Sometimes advisors take for granted that their clients are following the news about the recent stock market rally in the U.S. and Canada. If you are not glued to the TV screen watching the financial news networks, North American stock markets have indeed rocketed about 40% since March 9, 2009.
Most financial observers agree that the market will have to correct a bit after this significant rally, perhaps 10- 15% or so, before going back up. For the perennial pessimists, whose view is that the world is doomed to spiral down into darkness and chaos, now would be the time to exit entirely and graciously.
My current advice is to continue the dollar cost averaging strategy I had recommended, and to add new money on market pull backs. There is an enormous amount of cash idling on the sidelines – more so than the entire value of some stock indexes, and much of it is looking for a spot to land. Yields in bank accounts and chequing accounts are virtually zero and investors are interested in yield once again.
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A reader has recently asked me about the rise in the Canadian dollar and its effect on international investments.
Let’s use a house analogy to see how this works:
You bought a U.S. vacation property early this year for $100,000 when the Canadian dollar was $0.77. Unfortunately circumstances had changed and you had to sell the property only a few months after buying it. Fortunately, even after closing costs, you managed to sell the property at a higher price than what you bought it for. You sold the property at $105,000 U.S.. Certainly, a profit!
Back home in Canada when you reviewed your bank statements you realized that not only did you not make any money, you lost money! How come?
Here’s the math:
$100,000 US dollars cost about $1.30 ($0.77) when you made the purchase earlier this year.
At your Canadian bank you had to hand the teller $130,000 in Canadian dollars to obtain $100,000 US dollars to finance the purchase.
When you sold the U.S. property for $105,000 and took the U.S. cheque to your bank, the exchange rate was $1.08 (about $0.925) so you got back only $113,400 dollars.
Much to your chagrin, what you expected to be a $5,000 US dollar profit actually turned out to be a $16,600 loss.
So what happened?
The loss was caused by the appreciation of the Canadian dollar from $0.77 to $0.925 which in currency conversion terms meant that the US dollar lost value when it dropped from $1.30 to $1.08.
In local currency terms, the US investment clearly appreciated in value but the currency effect took away the gains. In other words, in U.S. dollars the investment made money – in Canadian dollars the investment lost money.
Do not forget that it works both ways. If the Canadian dollar had dropped in value rather than going up, the aforementioned Canadian investor could have additionally profited on the currency exchange.
The same applies to other U.S. investments such as stocks and bonds. If you own an investment in another country you will be affected by swings in currency – either to your benefit or to your detriment.
Canada’s dollar has been on a roller coaster ride of epic proportions, blasting through parity and peaking out at more than $1.10 US in late 2007 and then plunging down to about $0.77 earlier this year.
Canada’s sudden and unexpected return as a “hot” currency this spring has brought some disappointment to investors who can clearly see some improvements in the foreign stock markets yet their investments (based in U.S. dollars or other foreign currencies) are standing still or appreciating slowly due to unfavourable currency movements.
As I believe that the U.S. will soon perceive that a lower American dollar will be in their best economic interests, I am going to recommend not to increase exposure to U.S. dollar denominated investments at this time. To balance this view, one might expect that the U.S. could rebound very strongly as their recession ends hopefully, before summer’s end.
