Today’s Markets

It has been a good eighteen months since we have seen any significant corrections in the world’s stock markets. We have enjoyed a long stretch of growing portfolios, and now we are experiencing a normal correction in the markets. To put this into some perspective I will share some thoughts from a selection of sources, including some portfolio managers I spoke to last week at a conference I attended in the U.S.

Taking a macro view (large overview) there are a few things that are affecting the psychology of investors at the moment. The first is simply that many stock valuations have gotten ahead of themselves. As often happens, investors overreact and push valuations down below their real value. This represents an excellent buying opportunity for your portfolio managers. They love these kinds of markets, as great companies go “on sale”. We may not enjoy looking at our statements, but remember that your portfolio managers have a lot of activity going on in the background, setting you up for good future investment returns.

In Canada, the decline in oil prices has affected our resource heavy TSX. There is a glut of oil reserves at the moment for several reasons. You may find it interesting to know that the U.S. has been opening up their own oil reserves aggressively over the past years to the point where they will soon surpass Saudi Arabia’s production. In addition, the Saudi’s have ramped up their production, and of course there is our contribution through our oil sands in Alberta. So until these reserves are depleted we could see downward pressure on oil for a while (lower gas prices at the pump is a welcome increase to our personal cash flow). The markets are anticipating this negative effect to the oil industry by selling off.

Lastly, there are investor’s concerns over the health of various economies in the world, most notably Europe and the Far East. I want to emphasize that it is the overall economies that are of concern, not the health of the corporations we are all invested in.

The positive side is the health of corporations. Profits are up and they are still flush with cash. Companies are reinvesting in themselves by expanding through new products and facilities, and by buying other companies. This ultimately translates into more jobs for people (although they are different jobs than in the past), who will have more money to spend to help grow our economy. Our lower Canadian dollar is expected to continue its decline which is good for Canadian companies producing goods and exporting to the world.

Our economies continue to evolve and the companies that will grow and flourish are different than the leaders of the past. Your managers are looking more to sectors like Health Care and Technology which have moved from fringe players to the blue chips of the present and future.

To summarize then, it is time to ignore the headlines in the media, and focus on the quality of the companies in your mutual fund portfolios. It is not time to head to the sidelines, but rather an opportunity to add to your holdings while everything is on sale.

I received an email this morning from a portfolio manager who said “Volatility is the friend of the investor who knows the value of a business and the enemy of the investor who doesn’t”. It is our portfolio manager’s job to know the value of the businesses they buy and capitalize on their price fluctuations.

You are always welcome to come in and review what you actually own in your portfolio, or discuss any concerns that you may have.