It’s Friday night and, as usual, we found ourselves at a restaurant in Oakville. My wife said, “I really had a great time tonight. Oh, before I forget, remember the article you wrote about two economists who looked at the same US employment report but came up with exactly opposite viewpoints? Well, Mary Jane from my gym read your article in The Bay Street Times and thought you were so smart.
by David Yu, CFA
She wanted me to ask you what you think about the market. With the stock market going nowhere, oil prices setting new highs and possibly higher interest rates down the road, she is nervous about her investment. She wonders if she should bail out now.”
“Hmm, this is a tough question. I don’t know if I am smart enough to know the answer. Besides, if I do, we wouldn’t be dining out in Oakville. We would be in Tahiti, right?
I agree with Mary Jane that the market is confusing. There are good arguments from both sides of this debate. Somehow, I don’t think she should panic … at least not yet!
The recent rise in oil prices is a little troublesome. I don’t know how high oil prices would go. I would leave that to the experts. There are geo-political and fundamental reasons for prices to be high. Speculations have added to the volatility.
Remember the oil article we read recently in the Sunday New York Times? Stephen S. Roach, economist at Morgan Stanley, was quoted saying that ‘oil shocks, like the one that may be developing, have an awfully perfect - and perfectly awful - track record. They are always followed by a recession.’ Some strategists disagreed. They suggested that the world had changed a lot since the last oil crisis and we are not as dependent on oil as before. Perhaps these strategists don’t drive like you and me. It is definitely costing more to fill up our cars nowadays. I don’t even want to think about how much more it will cost to heat our home this winter.
As an example, according to Toronto Star, an average Torontonian ‘has paid 24 per cent more on the energy portion of their hydro bills since 5 months ago’. The extra money spent on energy is no longer available for other consumption. This would put a damper on the economy. Indeed, some recent reports have started to show a slowing in the US economy. Retail sales in the United States fell 0.3 percent in August - the third decline in the past five months. Consumer confidence in the US, as measured by The Conference Board, fell again to 96.8 in September after a decline in August. Closer to home, Canadian economic growth in July came in at 0.1%, which was much lower than forecast.
If the global economy slows down, we can expect the recent rise in interest rates to be delayed or more gradual. Central bankers have recently raised interest rates due to concern about higher inflation from stronger economic growth. I have been saying all along that inflation is not a serious problem. Just take a look at the Canadian inflation data in August. It was 1.9% year over year, which was tame. Central banks should be careful not to choke off the economy with too much tightening. If rates do rise, I would lock in those attractive rates.
With some exceptions, corporate earnings have come in strong so far. You must have seen those spectacular earnings reports from our ‘friendly’ banks. Some of them even boosted their dividends. Improving earnings should keep stock prices up. The recent sell-off in stocks could be due to the usual summer doldrums, increased level of terror alert and fear of economic slowdown from high oil prices. Don’t forget that the stock market had a nice recovery from the low found in late 2002. Some consolidation should be expected. Remember what I always say, ‘Buy when no one wants it, but sell when everyone wants in.’
This brings me to the last unknown - terrorism. The fear of another terrorist attack has gone up as the US election draws closer. I hope nothing will happen. Even if I was wrong, the market will survive like it had done many times before.
So, tell Mary Jane not to worry too much. She should check her investment holdings to make sure they are still appropriate given her investment objectives. Always take a long-term view on investing and not be distracted by short-term fluctuations. Never try to time the market because it is a loser’s game. Avoid market hype and hot tips. If it sounds too good to be true, it usually is. There is no free lunch and nothing is guaranteed.
At her age – and don’t tell her I said that – she should stick with quality companies with consistent dividend payout. Avoid economy-sensitive stocks if oil prices continue to move up. If she likes bonds, she should hold high-quality bonds, with short to mid-term maturities. This will provide her with steady income and some capital protection.
If she has a broker or financial planner, make them work for the fee she is paying them. Always ask questions before buying or selling – especially when the advice is from a family member or a friend. There is a Chinese proverb that says, ‘He who asks is a fool for five minutes, but he who does not ask remains a fool forever.’ And, I might add – a poorer fool!
Talking about asking questions, I am glad we asked Tony to recommend the wine for dinner tonight. As you know, I may know something about investing, but I am useless when it comes to wine!”
David Yu has over 28 years of investment counselling experience. An independent portfolio management consultant based in Toronto, David is a past President of the Toronto Society of Financial Analysts, past Chair of the Canadian Council of Financial Analysts and past CFA Institute Regional Director for Canada. He was elected to the CFA Institute Board of Governors from 1999-2001. David remains actively involved with CFA Institute, which was formerly known as AIMR.
