Gestion Férique Market Review

 

September 2011

 

Are “double-dip: fears overblown?

 

The last few weeks have seen the release of a slew of disappointing economic data. For example last month, the unemployment rate rose in the United States, Canada’s largest trading partner and job creation totals for the previous two months, were revised downwards.

 

Things aren’t much better here. Canada lost jobs last month too, and its economy actually shrank during the second quarter. The Bank of Canada too recently indicated the obvious: that the economic recovery here was not going as well as expected. All of this has increased speculation that both Canada and the United States could slip into a “double-dip” recession.

 

That said, the majority of private sector economic forecasters continue to believe that this is unlikely and that Canada is far more likely to see choppy growth through the second half of this year and into 2012.

 

However investors are right to monitor the situation closely.  That’s because recessions (which consist of two consecutive quarters of negative economic growth) generally lead to shrinking output and tougher price competition. This in turn can be rough on business profits and hence stock prices.

 

Yet despite the rough patches, Canada has a lot going for it. Continued strong growth in many emerging market economies, particularly China, is sparking strong demand for our raw materials and commodities exports.

 

In fact Canada’s trade deficit shrank to $753 million in July from $1.4 billion in June, a particularly promising sign. Canada’s automotive industry is also showing signs of life, as supply chain disruptions caused by the Japanese Tsunami begin to clear

 

Yet even if Canada slips into recession, money managers are unlikely to make major portfolio reallocations. That’s because stock markets are often an excellent advanced indicator of slower economic activity, so by the time a recession hits, the effect on stock prices has already been felt.

 

Conversely, stock markets are also excellent predictors of economic recoveries. Often, stocks will start rebounding sharply months before economic activity has noticeably picked up. Those that act too hastily generally end up paying for it by missing those initial surges. As a result, staying invested though markets cycles, has most-often proved to be the best strategy.

 

 

 

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Peter@peterdiekmeyer.com

 

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