Stock Market Update September 2015

Stock Market Update September 2015

In the investment world, we’ve had lots of interesting times in the past 2 weeks. Volatility (the ups and downs in the stock market) has increased dramatically and we’ve had several one days loses of 1 to 4%, followed by increases of up to 4%. Overall August was the worst month in 3 years for the US stock markets, and the first 2 days of September have continued the volatility. When a stock market falls 10% or more it is called a correction.

So what really happened?…..

Prior to August 19, the stock markets had small ups and downs during the year, but overall hadn’t really changed much in 2015. The TSX (Canadian stock market) was down 3.8% for the year and the S&P 500 (US stock market) was up 1.9%. The Dow Jones was down 2.7%. Clients who were invested in US stocks had seen gains in their portfolios by the change in the exchange rate.

Since August 19th, we’ve had 4 to 5 days of loses from about 1 to almost 4% per day, followed by several days of gains of almost 1 to 3 or 4%, depending on the market. This week on Tuesday the markets went down and Wednesday the markets gained.

So what the heck has been going on?

There are many theories about why the volatility is occurring, mostly related to what is happening in China. For the past several years, China has been growing rapidly and their growth has helped the rest of the world. In Canada it has benefited our economy by the Chinese demand for our resources which they need to build new factories and cities etc. Now China’s growth has slowed although it is still higher than North America. They are becoming a more mature economy. The Chinese government would like the economy to shift from an economy driven by government expenditure on infrastructure etc to a consumer driven economy (like the US). This is actually a healthy shift. However, the uncertainty of the slowing growth has contributed to the volatility.

China also has their own stock market which had gained significantly during the past year. With the slowing growth also came dramatic falls in this stock market. The net result is that it ended up at 0% for the year. The government did and is intervening in their stock market, which hasn’t worked that well. It is very difficult/impossible to control a stock market. Benjamin Tal, the economist at CIBC believes this action was a mistake and created a credibility issue, which was the major reason for the volatility.

A 3rd reason for the increased volatility is that the US Federal Reserve (the American version of the Bank of Canada) is looking at raising interest rates. Their interest rates are even lower than Canada, and their economy is much stronger. The 2nd quarter of gross domestic product was revised from 2.3% to 3.7%. It surprised by being stronger than expected. In the US they are adding 250,000 jobs every month, credit is rising, housing is improving, so their revival is a reality. This is why the Feds want to increase interest rates, but it makes the stock market volatile. Many analysts believe rates should have been raised earlier and once rates are increased, some of the volatility will end. Whenever they do raise interest rates, it is expected it will be a very slow process.

So what next?

I understand that the market volatility can be very uncomfortable, and stressful. If you watch the news it can turn an uneventful day into something very dramatic. However, it is good to remember a few things:

 Sizable corrections within a year are common throughout history. A typical intra-year drawdown for the S&P 500 since 1980 has been 14.2%. Moreover, there have been two other corrections significantly greater than 12% since the market bottomed in 2009, those being in 2010 and 2011. Over the past 4 years we have been ‘spoiled’ by having low volatility with good returns.

 Short-term indicators now suggest that stocks are at or near a bottom. With the severity of the decline over the past week, several higher-frequency technical, positioning and sentiment gauges flag the S&P 500 as a buy opportunity.

 Absent recession, the odds are low that the bull cycle has ended, which the stock market is increasing over time. The deepest, longest and thus most destructive equity market sell-offs have typically been associated with economic contraction. Leading indicators from around the globe suggest that GDP growth will be modest, not contract. Deep and durable selloffs are low odds developments in positive growth environments

It is best not to worry. In our investing years we will go through a lot of volatility. (Over) reacting would be a mistake as it is near impossible to consistently time the market. It is safer to stay the course and ignore market swings, as long as you have a well-diversified portfolio.

Also remember that equity investment returns are closely tied to corporate earnings growth and the price you pay for those earnings. Historically, over the long term corporate earnings have been fairly stable and have grown along with productivity gains and inflation. Stock valuations though are more volatile than earnings since they are influenced by investor sentiment, which swings between optimism and pessimism. Emotional humans make the stock market volatile.

To summarize, I think we will continue to have more volatility during September. However, this should not change the way you invest. Lastly a friend of mine stated that the stock market is the only market where when things go on sale, people run out of the store. Please contact me if you have any questions or concerns.