We manage $180,000,000 for 80 families across Ontario. A one per cent decline in our lives costs $1.8 million. This forces one to pay close attention to both long-term and short-term trends in the market. Here is what we are seeing…
The Canadian and US stock markets have wandered quite different paths this year. As of September 20, 2013, the S&P 500 is up more than 20 per cent, while the TSX is up a modest 2.2 per cent. The TSX has also exhibited much more volatility than the S&P 500. The TSX has traded in a 1,200 point range from a low of 11,700 to a high of 12,900, retracing from top to bottom four times, with two very sharp declines in March/April and May/June, each time followed by equally sharp rallies that brought the average back up to the top of the range. Finally, in late September the TSX broke to new high ground above 12,900. The US market, on the other hand, followed a steady march interrupted only twice by modest declines in June and August. It too broke to new highs in late September along with Canada.
The primary factor driving movements in the markets for the better part of 2013 has been the emotional roller coaster known as the Fed watch. Indeed, the S&P 500’s first correction in June was caused by Fed chairman Ben Bernanke first musing about easing up on his quantitative easing program of buying $85 billion worth of Treasury securities every month to help stoke the economic recovery. He mentioned it then because some of the economic data coming in indicated the recovery was gathering momentum. Not long after, the next set of economic data reported the opposite and the market rallied, since this meant the Fed would postpone easing. The next set of data indicated that, yes, the economy was in fact doing pretty well. The market sold off in response thinking that easing was again going to happen sooner rather than later. Further data predicted a mixed picture and the market rallied, but by now it was widely assumed that the Fed would begin tapering. At the September Federal Open Market Committee (FOMC) meeting, Mr. Bernanke surprised the markets by maintaining its bond buying program, saying that the employment picture had not sufficiently improved for it to taper its monetary easing. The markets – both in the US and in Canada – exploded to the upside breaking out to new highs.
The Canadian market saw the effects of all this mostly through the reaction of the gold market to the Fed machinations. The formula is quite basic: economy doing poorly, monetary easing, good for gold; economy recovering, tapering of easing, bad for gold. The fact that gold had been in a bear market for most of 2013 did not help, and the large weighting of gold and mining stocks in the TSX resulted in the lackluster comparative performance of our market and accounted for much of the volatility.
The net effect of all this is that investors have been roiled by an absurd situation where the markets sell off when the economy appears to be gaining strength and rally when the economy appears to be struggling. It’s enough to make an investor give up.
The key to preserving one’s sanity in the face of all this is to maintain focus on the long term and make adjustments to portfolios as the markets swing from one extreme to the other. All of this concentration of time and energy on the movements of the Fed is counterproductive and trying to trade around press releases and economic data is folly of the first order. The US economy is recovering and almost certainly will regain its health. After having been at record lows for the better part of five years, it is only reasonable to accept that interest rates will rise with a recovering US economy. In this environment, equities should outperform bonds and a judicious shifting of asset mix in that direction is probably the most important investment decision to make. PA