SI Ferique

 

February 9, 2014

Dealing with the dips

Canadian equities held firm during January. The S&P TSX gained a modest 0.54%, excluding dividends. However key global markets took a downwards turn. The US S&P 500, London and Paris benchmark indices, lost 3.56%, 3.54% and 3.03% respectively, in local currency terms.

These dips came as a surprise to many investors, who have grown accustomed to the steady gains registered since the 2008 financial crisis and the ensuring recession. Last year alone, almost all the major global indices recorded such large increases, that things were almost bound to even themselves out. Market professionals, who had been suggesting that a correction was in the wind for some time, treated the pullbacks with relief.

Navigating the “saw teeth”

Learning how to ignore the day-to-day and week-to-week market fluctuations is one of the hardest things that new investors need to adjust to. A five-year chart of the S&P 500 composite index as of the end of January, looks like a series of saw teeth, with the general direction sloping upwards up in a steady rise. During that time, the benchmark index more that doubled. A chart of the Toronto index, excluding the resources sector (which has been having a rough go of it lately due to weak demand from emerging markets) would look roughly the same.

As a result, it should come as no surprise that seasoned investors tend to look at markets over a longer term horizon. True many noted that job creation in the United States was below expectations last month, that the Chinese factor sector contracted and that Europe flirted with deflation. The fact that the US Federal Reserve began to taper its bond buying program, leading to fears that longer term interest rates could creep back up, also drew attention. However few seasoned investors radically altered their portfolios based on that short-term information alone.

What matters more to the experts are the fundamentals. For example right now interest rate levels are extremely low, which is boosting the relative attractiveness of equities.  The global economic outlook, which basically tracks growth in corporate profits, is also looking better. The International Monetary Fund recently raised its global real gross domestic product growth forecast to 3.7%, and that of the United States to 2.8%. Experts generally figure with those key data points in line, and inflation low, that stocks over the long term should generally continue their upwards climb.

That’s not so say there won’t be contractions, far from it. For example after the 2008 recession US investors suffered considerable pain, and it took several years for markets to get back to their old highs. However since then, every pullback in the S&P 500 has been accompanied by an even greater surge ahead in the following weeks and months.

Ironically what happened to the January dips too. Within the first few days of February, the US S&P 500 had recovered almost all the lost ground.

peter@peterdiekmeyer.com

 

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