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| Adrian Mastracci, portfolio manager at KCM Wealth Management, says "Jittery markets make one thing very clear. Investing is a long journey, not a fast destination." |
Vancouver, BC (July 30, 2007): Last week was not pretty for Canadian markets. Nor for US markets. Actually, not for the rest of the world markets either. The losses tally around US $2 Trillion. Ouch!
Frederick B. Wilcox once said, “Progress always involves risks. You can't steal second base and keep your foot on first.”
Adrian Mastracci, portfolio manager at Vancouver based KCM Wealth Management, comments, “Portfolio managers aim to design investment plans whose parts don’t all move in the same direction. Last week, even well diversified portfolios hiccuped. Practically, everything moved lower.”
So, what happened? Is a tire going a little flat? Or, could it be the edge of the ledge?
Most investors rediscovered risk. Both the equity and debt markets were affected. Sellers found willing buyers at lower prices. Some buyers were even snapping up initial public offerings.
Risk aversion is rising quickly. Investors have plenty of jitters, anxieties and fears to mull over. It feels like the markets are having a mid-life crisis.
Three weeks ago, the same investors were jumping onto bullish wagons aiming for new highs. Lately, they’ve been stampeding for exits to safer harbours. All this contributes to a heightened “wall of worry”.
Looking back
The Dow Jones index has returned nearly 7% for the last 50 years and 5½% for the last 80. Investors have weathered 23 bear markets in the Dow since the year 1900.
My bear is defined as a drop of 15%, or more. Hence, investors have experienced a bear market, on average, nearly every 5 years. Typically lasting from 3 months to 3 years.
In contrast, our current bull market is approaching its 5th birthday. The US has been enjoying a 6-year economic expansion. However, things may cool some before advancing again.
There is more good news. Thus far, the markets have rallied back from declines to make higher highs. But, past results should not be relied upon as indications of what may lie ahead.
Who drives the bus
In the long-term, markets are affected in a big way by two drivers. One is corporate earnings; the other is interest rates. I’ll point to some US indicators.
The new benchmark is single digit earnings increases. Investors have been spoiled by years of double-digit growth. Further, some earnings warnings are dampening future prospects.
Debt markets are deteriorating. While there was no Fed rate move last week, investors recognized that debt markets have begun to squeeze the financing for current merger and acquisition deals.
Appetite for bonds is declining. Some bond offerings are postponed or cancelled. Sub-prime bonds have fallen. Mortgage applications have slowed. Loan delinquencies and foreclosures are rising.
Oil is again flirting with high prices. The housing slump continues to shave economic growth. The index of leading indicators has declined four of the six months ending in June.
Economic data builds the case for slower economic growth in the second half of 2007. Perhaps, into 2008. Expect growth – maybe not the record pace we’ve had.
Looking ahead
It can be scary if it’s the edge of the ledge. Nobody knows what will happen to market directions. However, wise investors are always ready for both the upside and downside market moves.
I remain cautious, favouring defensive strategy. Investors should stay focused. Tuning out the many distractions of the day. Sticking to their knitting.
Some simple suggestions:
- Investors can’t control the market outcomes. Rather, they can control their interactions with the markets. Like risk tolerance, diversification levels and asset mix. That’s the vital focus.
- Declining equity markets, like last week’s, have often delivered a quick upside bounce. Followed by further declines to lower levels. Be vigilant. The volatility could continue.
- Downsides may inflict lasting portfolio pain. Try not to incur large losses. Reflect before making extreme, hasty or emotional moves. Common sense works best.
- If equities feel risky, prune gradually. If they feel bargain bin, buy gradually. Reassess bond maturities for comfort and appropriateness.
- Investors should also revisit their comfort with borrowings and risky investments they may have.
Jittery markets make one thing very clear. Investing is a long journey, not a fast destination.
The days ahead will bring plenty of new economic data releases. Perhaps, the likes of US consumer confidence and job creation numbers may improve investor sentiment.
Step carefully. Keep tabs on the big picture. Nobody makes money all of the time.
I welcome your contact. |
