Gestion Férique Market Review

November 7, 2011

Title: Staying the course during times of uncertainty

 

The early days of November proved particularly hectic for investors as European leaders worked overtime to agree on a Greek bailout package. The idea was to contain worries about debts of other euro-zone economies particularly Italy.

Markets calmed noticeably after Greek Prime Minister George Papandreou agreed to a huge $130 billion package of direct aid, which included a 50 percent write-down in the country’s debt to European banks.

 

However the next day, Papandreou surprised everyone by floating the idea of holding a referendum on the austerity package that the country was forced to accept along with the aid. Flustered by the prospect of waiting three months for a resolution to the situation markets tanked. After considerable pressure, Papandreou reversed his position, and soon after he tendered his resignation.

The incident provided market watchers yet another example as to how skittish investors get during times of uncertainty, and why it pays to remain calm when that happens.

 

Investors are heavily influenced by both fear and greed, which means that navigating volatility, is an inescapable part of stock market investing. That said it is important to remember that volatility doesn’t just act on the downside. For example the release of strong recent economic data  that showed that US GDP rose by 2.5% during the third quarter, following weak performances of 0.4% and 1.3% growth during the first two quarters, greatly reduced fears by market participants that a recession may be imminent, which pushed up equity indexes. Here in Canada, gloomy October Labour Force Survey results had the opposite effect.

 

Over time, professionals have learned to reduce exposure risk by diversifying by investing in many companies, industries and countries at once, often through purchases of mutual funds or similar vehicles. Yet while its important to stay on top of political and economic developments, it’s also crucial to not get too wrapped up in the news of the day.

 

That’s because, for a variety of reasons, much of what comes across in the media is hyped up considerably, in part, to encourage people to watch more news. Politicians also have a lot to do with this.

 

For example recent negotiations in the United States among Democrats and Republicans in the Congressional “super committee,” which is supposed to suggest a series of tax and expenditure measures to get the federal fiscal situation in order, have led both parties to create a crisis-like atmosphere. Experienced bargainers do this all the time, to scare the other side into backing down and making concessions. This happened in the earlier US debt ceiling negotiations and European bailout talks too.

 

In short, while investors do need to keep a close eye on market developments, those that ignore short-term noise, like Greek referendum threats, will almost always do better than those who try to trade around them.

 

Peter@peterdiekmeyer.com

 

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