June 30th is the end of the second quarter and also the mid-point of the year.

As we are at the halfway point in the year, I thought I would bring everyone up to date about the stock markets, interest rates and the economy in general.

In the last three months, market psychology has greatly improved and along with it, many stock market indices – Canada and the U.S have been up as much as 40% from their March 9th 2009 lows.

Market forecasters range from the overly pessimistic to the overly optimistic.

I am in the firmly optimistic camp as I believe that the worst of the bad news appears to be behind us:

• The grave concerns about the stability of the American banking system appear to have abated. The U.S. has a new president with a strong mandate to re-regulate the financial system and to “make things right”.
• Although the economic numbers in the U.S. are plainly bad, business sentiment has shown some improvement and a few economic indicators show things are turning around. 
• The “credit crunch” or “credit freeze” headlines have become old news as banks are lending once again.
• Canadian and U.S. automotive industries are in the process of restructuring. Chrysler is already out of bankruptcy and GM should emerge out of bankruptcy protection as well.
• The U.S recession which started in December 2007 is likely nearly over.

Caution ahead

The Canadian economy and American economy although improving, is not out of the woods.
There are still a number of challenges:

• As mention in an earlier article, the American consumer is in relatively poor shape. Their housing market compared to Canada, is in bad shape. Economic historians will surely point their finger at the collapse of the American residential mortgage market as the ultimate cause of the global recession.
• American consumers are tapped out with too much debt and can’t likely spend themselves out of a recession. Recovery could be slower than normal.
• Businesses are like oil tankers. They are difficult to change direction quickly and historically this means that they will continue to cut back even as the recession ends. In other words, unemployment may continue to increase for a while even as the economy starts to recover.
• Massive spending by governments. Will it be too much stimulus? Will printing money cause other economic problems like inflation, down the road?

Optimism returns

Thankfully, recessions are generally short term in nature. Most are about a year and a half. Even the longest ones are less than two or three years in duration.

Reasons for optimism:

• The U.S. is addressing their banking/financial problems.
• The “credit crunch” is mostly over.
• Low interest rates are reducing debt loads and bolstering savings laying the groundwork for increased economic activity in the future.
• Investors are saving and reducing debt.
• Canada’s stock market has positive returns year to date.

What I’m recommending today

Interest rates are at historic lows. Any gains in the bond market created by declining interest rates are pretty much over. Although there might be some opportunities in the corporate and junk bond markets, I believe these investments are too sector specific and risky.

The same applies to focusing on only one investment whether it is energy, mining or biotechnology. Stay diversified.
In the short term, I expect interest rates to stay low through to mid next year, possibly even for the entire year.
Longer term we may see increasing interest rates. If this is the case, then GICs rather than bonds will be the preferred investment. Although laddering or staggering GIC maturities is considered to be an unexciting investment strategy, it preserves capital while allowing us to capture higher interest rates.
Consider the use of guaranteed mutual funds like the IA Clarington Target Click Fund or mutual funds in combination with GICs in order to have the potential for some growth in your portfolio while protecting your capital.

Although there no doubt that Canada’s harsh recession will take their toll, this country is in far better financial shape than most. I believe that the “point of maximum pessimism” is past and better times are ahead.

The stock markets will continue to go up and down – sometimes a little, sometimes a lot. In the last 10 months or so we have witnessed once in a lifetime financial events which have tested to the utmost – our resolve. Despite the financial hurricanes, our investment strategy remains intact.
Avoid advisors that are promising high returns with no risk. These investments do not exist.

In every newsletter, I remind our readers that times and circumstances change. If there has been a material change in your life – a new job, marriage, birth, etc, a change in your risk tolerance or investment horizon, I will be happy to sit down with you and update your financial plan. Even if there are no material changes, I would strongly urge you to contact me at least once a year to review your portfolio.

Lastly, I would like to thank everyone for “staying the course” despite the financial storms. It has been an exceptionally challenging time for everyone. If there are any questions or concerns, please do not hesitate to call us at any time.
Hoping everyone has a great summer!

Glenn Szlagowski – Financial Advisor

Kim Carter – Mutual fund salesperson

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

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