Stocks tumbled to 5 year low yesterday with North American markets declining between 6% and 7.5% and global markets were not that far behind.
There is a lot of stuff going on but investors are digesting an increasingly “bleak” outlook for the global economy following disappointing earnings results and future outlooks from companies around the world.
We also saw oil prices decline significantly to a 16-month low and other commodity prices were not far behind. Energy and materials company shares fell sharply lower as these sectors led declines yesterday. Investors got very nervous when the Bank of England Governor Mervyn King said Britain was probably entering its first recession in 16 years.
The theme remains the same as investors are concerned about a deep global recession, deleveraging, credit crisis, deflation and significantly reduced worldwide demand (especially from the U.S. consumer and emerging markets). There are no sectors that are safe. We are in a recession and the outstanding question will be the magnitude and the length.
Investors are also selling emerging economies or countries as countries like Argentina and Pakistan may default on their debt and several others (Belarus) are seeking help from the International Monetary Fund (IMF). These events are just compounding market nerves!
This morning Jim Flaherty (Canadian Finance Minster) announced the creation of a Canadian Lenders Assurance Facility. The aim of this facility is to provide lending support in Canada and to keep Canadian banks at parity with foreign banks (who are getting handouts). Overall, Canadian banks are financially sound (based on what we know) and this really acts like “backstop” for foreign investors.
Things will continue to be volatile since the Chicago Board of Options Exchange (CBOE) VIX index (measure of fear or volatility) jumped above 70, but it is off its historic high of more than 81 set last week (that is a very material change). 70 is very, very high and thus, investors are still expecting big price swings in either direction in the short-term. I would expect to see some more losses today and potentially tomorrow but stocks are still up about 9 to 10% from their intra day low on October 10. I would not expect them to drop back down to their intra day low on October 10, 2008.
Many investors believe that stocks are oversold but that does not mean that markets have hit the bottom A sharp rise in stock prices is possible when bargain hunters come back into the market. The reality is that all investors are selling to reduce risk and you have more sellers (hedge funds, margin calls, fund redemptions in mutual funds, hedge against the U.S. dollar etc…) than buyers and thus, you have price deprecation.
Once you have a realization that U.S. residential real estate prices have stabilized, that investors have deleveraged and that investors realize that the world is not going to end, you will see stocks appreciate in value.
Unfortunately, in the interim the new ‘norm’ will be excessive volatility but long-term investors will be rewarded based on these current prices and valuations.
Wilfred Vos Bcs, CFP, FMA, FCSI, CIM, CFA, MBA, DMS, CBV
SVP & Partner
