The bear market is “hanging tough” but it will be defeated at some point.
Stocks sold off yesterday for a 2nd day. U.S stocks dropped by 4.85% to 5.00+% and while Canadian stocks did a little better, this is the worst two day slide since October 1987 (October 2008 was pretty bad as well) and stocks have given up about half their gains from the October 27 low point.
Disappointing corporate earnings and outlooks compounded by “bleak” sales figures from major retailers fueled investor fears of a deepening economic recession. Monthly retail sales data was the worst in more than 30 years in the month of October as consumers slashed spending. Cautious investors are waiting for today’s jobs data, which will likely underscore the weakening economy.
Oil also sold off again yesterday by a further 7% and at one point last night touched $60.00 per barrel. Materials did not do much better either. Both groups are poised to do better today according to the futures market.
Today you will also see and hear more from the U.S. auto industry as they continue to lobby Capital Hill for more aid to help them survive this economic turmoil and higher gas prices (not unlike the Chrysler bailout of the 70’s). I would also expect to see consolidation in the auto industry and additional rationalization.
I have mentioned before that there are three major factors impacting us today: 1) credit markets; 2) the stock markets; and 3) the economy. Things are bleak and it will take time to get back what we have lost in the last 3 months. However, if we make back what we lost in the next 3 to 5 years stock prices can appreciate in value by 60% and investors should be rewarded.
Stock valuations are very cheap on a historical basis and credit markets are thawing (both LIBOR and the TED spread are at their pre-Lehman bankruptcy levels). The economic numbers are bleak, jobless claims will go up and the economy will contract but equity markets have already factored in a significant amount of very bad or bleak news. Since the stock market is forward looking any positive signs will ignite a new round of bargain hunting (like a bottoming out of U.S. residential home prices and we are seeing some M&A activity with Panasonic buying Sanyo).
I would also expect a further round of interest rate cuts in the short-term. The new President Elect is scheduled to speak this afternoon in Chicago. He will likely speak about his transition plan and transition team. He will also need to take action in advance of January 2009 since he needs to lead the world out of this financial crisis.
Stay diversified but stay the course! The perception of risk is always highest when the actual risk is the lowest (assuming the world is truly not going to end).
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
