Our Letter to Clients: Stay the Course

//Our Letter to Clients: Stay the Course

The long-awaited market correction has finally arrived, and with a bang at that. In our meetings with clients and in our periodic pontifications on radio and TV, we have consistently expressed the view that the straight up momentum of world stock markets could not and would not continue, and that we were bound to see a market draw-down of at least 10%, and perhaps as much as 15% or 20%, likely some time in 2018.  That sometime turned out to be this month, and the strong gains of the US market in the first four weeks of the year were erased in startling fashion.  The Canadian markets, which had not fared nearly as well as most of the rest of the world in either 2017 or early 2018 have suffered as well, although less spectacularly.

Sometimes markets fall in reaction to events in the economy. This was the case in 2008. The implosion of the US housing market, a near-death experience for many of the largest banks in the world and a global recession, were ample reasons for investors to head for the exits.  Sometimes markets simply fall because investors feel they have risen too far too fast. This is the more common kind of correction, which on average, happens about once a year, and it is this kind of correction which has been missing in action. The last time the main US index, the S&P 500, fell more than 10% in a month was in September 2011, more than six years ago.  Based on past history, this correction is about five years overdue.

It is important to understand that by all measures, the world economy in general and the US economy in particular are in very good shape. Here are the important data points:

– World economic growth is the strongest in at least ten years

– Employment is growing quickly and is at “full employment” levels in the US and Canada

– In spite of strong growth, there has been very low inflation, running around 2% to 2.5%

– Most important for shareholders, corporate earnings are at record highs, and are rising fast

We buy stocks to own a share of profits. When they rise, stock prices tend to rise as well. Sometimes the market gets ahead of itself, and prices rise too fast. When this happens, opportunistic sellers unload stock they think is over-priced to enthusiastic buyers. The wonderful thing about markets is that they self-adjust. When the sellers sell too much, equally opportunistic buyers appear, in search of bargains.

All of our clients know that we do not buy speculative stocks or derivative instruments, the parts of the market that have experienced the fastest falls, but a feature of this kind of correction is that often there is little discrimination between the good, the bad and the ugly, at least in the short run. In the medium and long term, we remain committed to our firm belief that quality always reveals itself and that good companies with real earnings will always return to their real value.

We don’t know what suddenly caused the market to turn 180 degrees and head down rather than up. There are concerns about rising interest rates, and they are real. There is talk of higher inflation, although there is little evidence. The high drama governance of the United States is certainly cause for continuing amazement, but that situation has not changed in the year since President Trump’s inauguration.

Since we don’t know what caused the market to turn down, we don’t know why or when it will turn up. But we do know that it will. Over 150 years of market history teaches the most important lesson: owners of high quality stocks that earn profits and pay dividends, make money over time.

We act in accordance with our beliefs. In times of market turmoil we are very slow and cautious traders. Mostly we hold our investments, knowing that their value is independent of the day-to-day market price, and we patiently await the opportunity to buy quality at a discount.

 

David Baskin, President

Barry Schwartz, Vice-President and Chief Investment Officer

Scott Mazi, Vice-President and Portfolio Manager

February 9, 2018

By | 2018-06-28T12:30:39+00:00 February 9th, 2018|Blog|