In reaction to the global market selloff of the past few days, we thought it would be useful to communicate our thoughts on what is happening and what we are advising our clients to do with their portfolios. While we are not happy about the ten day drop and emotional selling going on globally, we are urging clients to hold on to conservatively positioned managers in this time of uncertainty.
Markets continue to drop following yesterday’s decline of 3 to 5%. This decline continues to nag in the Far-East and Europe. Good employment reports from both the US and Canada this morning have thus far failed to restore confidence.
Markets have declined since April. Active traders have been cutting their investment positions as their outlook is clouded by the political and economic news. And analysts have been reducing year end estimates for GDP and corporate earnings, factoring in the possibility of a further slowdown.
The U.S. political fiasco over the debt ceiling has severely weakened confidence. They finally arrived at a yes vote but the debate merely clarified the extent of political polarity and the importance of reducing debt levels. Some traders are characterizing this down draft in the market as investors penalizing politicians for half-actions (US insufficient handling of the debt ceiling package, France/Germany’s casual approach to solving the debt crisis in Europe).
Europe set off the decline this week as it became clear that the sovereign debt crisis is worse and extends to Portugal, Spain and Italy. European banks’ stock prices have declined seriously with fear that their holdings of sovereign bonds are worth less than thought. And other bank stock prices are following them down on fears of global banking contagion (even if they don’t have meaningful exposure to Europe, like the Canadian banks).
Believe or not, there is a flight to safety to the U.S. dollar. Yes, the same dollar that was threatened by debt overload last week. The Canadian dollar has declined against the U.S. currency, as has everything, except the Swiss Franc.
What do we think?
The U.S. Federal Reserve and Treasury Department will try to encourage employment, but they don’t have much ammunition. So it is likely that we will see a slowdown in economic growth. Markets will be volatile. Interest rates will decline in spite of the concerns about inflation.
Still, your investment managers have anticipated this weak growth, and have selected securities that are defensive and that are priced at discount to the market. They believe their portfolios are even safer than the previous market low of March 2009, as most companies they hold have experienced profit growth and improvement of their financial fundamentals. So the drop in the price of these stocks does not reflect improvements over the last two years, and these values will support your investments as we struggle through this volatile period. Bonds also have increased in value, and are helping balanced investment accounts.
We are recommending that our clients remain invested with conservatively positioned managers that hold multinational, income producing stocks and safely positioned government and corporate bonds. Our KFA Balanced Pool, which is conservatively positioned in high quality stocks and bonds, is down only 2% versus the equity market drop of 4 to 7% since July 31.
We hope these comments, while concerning, will give you some confidence that your diversified professional investment management will help you through this challenging environment.