December 2009
Year in review
The year 2009 started on a hopeful note as the markets made some encouraging gains around the Christmas holidays in 2008. The steep declines due to the sub-prime crisis in the U.S. and collapse of very large American financial institutions created a worldwide panic as investors fled to cash starting about mid-September 2008.
In 2009, U.S. and Canadian markets resumed their steep decline in January and by early March, markets in Canada had declined by a further 15% and the U.S. was down by 25%.
Some economic forecasters were even talking about another deep Depression or at the very least, a prolonged period of economic contraction.
Just as the consensus believed that it would be years until the markets would ever recover, the stock markets made a remarkable recovery starting on March 9, 2009. As of early December 2009, global markets were up by 50% to 65% and Canadian and U.S stock markets are up 50% to 60% from their March 9th low.
Road to recovery
It appears that the worst is behind us. Statscan has reported very slight, but positive economic growth in Canada. This signals the official end of the Canadian recession. The U.S recession likely ended sometime this past summer – perhaps July or August.
Despite the recovery in domestic and global markets, there remain some challenges.
Unemployment usually continues to rise even as the recovery takes hold. Unemployment therefore, is a lagging indicator rather than a leading indicator. We can expect unfortunately, that unemployment may get a bit worse before it gets better.
Our most important trading partner, the U.S., has some lingering problems. Their decimated housing market is slowing the recovery, unemployment is very high, excess manufacturing capacity remains a problem and lastly, very high debt levels caused by U.S. government bail-outs and stimulus packages are a concern.
The U.S may have to take a page from Canada’s own history book when we had to address our extreme debt levels in the 1990’s.
Our painful cure was higher taxes, lower government spending and a lower Canadian dollar. Perhaps our southern neighbour is contemplating the same.
A case for optimism
On the positive side, the U.S. is addressing these challenges and a recovering economy will likely right itself. A cheaper U.S. dollar will make American products competitive and give them a tremendous trade advantage. Shuttered factories will reopen and people will be re-hired. Unemployment rates will start to drop.
In Canada, the economic picture is considerably rosier. Our housing market is very strong at the moment (unlike the U.S), unemployment is lower and rising commodity prices are giving our economy a boost. Our banks are reporting healthy profits.
In Europe, the EU(European Union)is starting to withdraw their monetary stimulus program which is a very encouraging sign.
Far East and emerging economies have fared much better than North America and Europe and these economies are growing by leaps and bounds despite America’s problems. A lower American dollar will benefit these economies.
Despite the recovery in world markets, the general sentiment and confidence level of many investors remains quite negative. As a result, a majority of investors have preferred to watch on the sidelines and even large rates of returns have not prompted investors to fully participate in the equity markets. This is starting to change.
Canadians have hoarded record amounts of cash and due to historically low interest rates – most of it is earning almost nothing. Will Canadians keep that money in cash for another year? I do not believe so. They will be looking for investment alternatives. Please see me for what these alternatives are and if they are suitable based on your circumstances.
Portfolio reviews
Although I tend to spend a great deal of time studying the macro-economic picture, the most important work I do focuses on the client’s portfolio.
Throughout the year, all of my clients have received an invitation to do a complete and thorough portfolio analysis. If you have somehow been missed – or have not been able to respond, please call us immediately.
For retired clients and those who are withdrawing from their investment accounts on a regular basis to supplement their income, I am recommending that we move a portion of your equity holdings to a money market fund, Canadian mortgage fund or perhaps, a short-term Canadian bond fund. You may consider moving enough money to sufficiently fund your withdrawals for the next year or two. As everyone’s circumstances are different, please see me about this.
For investors that are in their accumulation phase, do not ignore equity mutual funds especially the international mutual funds. I see good value there.
In summary, we are more than just cautiously optimistic about the markets and the economy.
We have learned, especially in this most challenging year in decades, that discipline, diversification and patience most of all, have rewarded the long-term investor.
Best wishes for a joyful holiday season – I look forward to talking to you in the New Year.
