Services d’Investissement Férique


Market Review

August  2012


Staying the course during the summer months


“Sell in May and go away,” stock traders often say, due to the sluggish performance and low volumes that tend to occur during summer. That strategy didn’t pay off during July though, as major OECD equities markets in the United States, Europe and Canada showing good gains. Japan was the lone major exception.


On the bond front, the European debt crisis and the US fiscal cliff continued to dominate the attention of fixed income investors. In Europe, following the close Greek elections, the focus shifted to Spain and Italy, both of which have been forced to pay increasingly rising interest rates on their debt. In recent weeks haggling between ECB president Mario Draghi and the debtor economies ramped up, regarding conditions to be set if the central bank were to buy their bonds, in a bid to push down their borrowing costs.


In the United States market focus has increasingly been on the upcoming November elections, now just three months away. The particularly tight race at the federal level (Barack Obama maintained a slight lead over Mitt Romney in battleground states in recent days) has caused large businesses, who many believe will take better care of their interests, to vastly increase fund flows to the Republican candidate and his associated PACs.


The tight race, coupled with those at the Congressional level, has increased partisanship and rendered resolution of key budget issues, which need to occur to forestall massive tax increases and spending cuts at yearend, unlikely to occur until the lame duck session. Bond traders were also particularly disappointed by the FOMC’s latest decision not to initiate further stimulus right now. However investors and businesses, who continue to benefit from extremely low US borrowing costs, cheered up substantially after news emerged that the US economy created 163,000 jobs during July, a strong upside surprise.


Canada too continues to benefit from exceptionally cheap money, though there were noticeable shifts during the month. Bond rates rose at the shorter end of the yield curve and fell at the longer end. Two, five, ten and 30 year rates ended the month at 1.09%, 1.32%, 1.68% and 2.27% respectively.


On the equities front, the elephant in the room is whether stocks will continue the positive momentum that gathered speed in July. American large caps in particular have huge cash hoards on hand and have been posting healthy profits, which would augur positively.


On the other hand if stocks do tend to underperform in summer one would imagine that investors should lighten up during those months. The problem is that markets are fickle, as can be seen this year. As a result, long-term buy and hold investors like the Gestion Férique prefer not to trade excessively. This help to minimize tax and transaction costs and avoids “market timing strategies” which tend to be overblown and often backfire.


Our philosophy is rather to invest consistently in long-term value issues – at whatever time of the year they become available.







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