1. August 5, 2011
Market corrects amidst economic uncertainty
What’s happening?
Investors caught a case of the jitters this week as fears about the global economy spooked the markets.
On Thursday, Aug. 4, stock markets tumbled as investors became increasingly worried the U.S. economy
was headed toward another recession and the possibility that Europe’s debt crisis might spread to larger
economies. With recent general weakness and yesterday’s sharp pullback, major stock markets have
erased year-to-date gains. From their 2011 highs, the S&P500 is off 12 per cent and the S&P/TSX
Composite Index is down 13.3 per cent (as of market close Aug. 4, 2011).
The sharp rise in the VIX index, a measure of stock market volatility, clearly indicates fear has once again
taken centre stage, like it did last summer. With media trumpeting the market pullback from front pages
and screens, investors are understandably rattled and concerned.
What’s next?
Clearly there has been some slowing in the growth rate of the U.S. economy – reports on manufacturing
and consumer spending support this. On top of this, the Eurozone sovereign debt problems remain
unresolved along with recognition that the U.S. deal is not a silver-bullet solution; it is understandable
investors have become nervous.
The very public U.S. debt ceiling political wrangling negatively affected consumer and business
confidence. As a result, the markets are likely to be turbulent over the next few weeks. Investors are
moving to a risk-adverse stance and seem to be willing to sell at low prices.
While their fears are not likely to be allayed in the very near term, other investors may see this as a
buying opportunity. Friday morning’s U.S. jobs report is one example of how, when sentiment is very
negative, even modestly positive news can be very well received. As this highlights, not all recent
economic data has been negative. Overall, economic data is not at levels that would suggest a double
dip; however, we will be watching to see how much damage has been done by the debt-ceiling crisis and
Europe’s handling of their debt issues. We expect U.S. policymakers to be watching events very carefully
before deciding whether to do anything to support the markets, as they did last summer under similar
market conditions.
Investors should also keep in sight attractive market fundamentals despite the fog of emotions.
Companies are in the midst of reporting second-quarter earnings, and results are looking strong. For the
S&P500 companies that have reported so far, approximately three quarters of them have beat
expectations. Results have been strong for both top-line and bottom-line growth. The combination of
falling prices and rising profits has driven stock valuations down to very attractive levels from earlier in the
year and compared to historical levels It appears in the near term, however, macro concerns will override
attractive market fundamentals in North America; hence our expectations for continued unsettled market
conditions.
Keep a long-term perspective
Last year at this time we saw a similar crisis in confidence. After a spike in fear, policymakers took steps
to reassure markets. The result was a strong market rally.
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2. August 5, 2011
Since then, evidence has continued to accumulate that, while not robust and with many challenges, the
U.S. economy continues to move forward. And, we have to recognize that companies have done a stellar
job in managing through these conditions.
Keeping an eye on long-term fundamentals will prevent investors from knee-jerk reactions and their
potential damage. We have all seen the statistics showing that investors tend to sell when they are
scared (i.e. when others are selling and prices are low) and buy after confidence is restored (i.e. when
prices are high) hurting their overall long-term returns.
With investors focused on the very near future and in a skittish mood, it appears difficult to see what
catalysts will move the market higher. While this is true, a lot of bad news is already priced in and, unless
the news continues to get worse, we expect sentiment (and equity prices) to normalize over the coming
months.
Going forward
GLC Asset Management Group’s (GLC) portfolio managers and analysts are always monitoring factors
that affect the investment mandates they manage. This includes economic and market conditions to
identify opportunities that provide long-term investors with attractive risk-adjusted opportunities. Over the
past two years and leading into the second quarter of 2011, world markets, including the S&P/TSX
composite index and the S&P500, experienced a significant market run, so a consolidation of gains in the
markets and a general re-pricing of risk is normal.
While market volatility may be taking top headlines now, in the longer term investors will benefit from
renewed confidence as market fundamentals and corporate balance sheets take precedent over
headlines and top-of-the-hour news reports. This plays right into the strengths of professional active
portfolio managers and GLC’s disciplined and process-driven investment styles at GWL Investment
Management, London Capital Management and Laketon Investment Management.
As professional money managers, we know volatility can create significant opportunities and we remain
ever-watchful for any investment opportunities that may emerge. Likewise market volatility can create
opportunities to demonstrate the benefits of professional financial security advice and a diversified, long-
term investment plan. When market volatility is at its highest, the premium for informed, timely and
balanced financial security advice is at its highest.
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The views expressed in this commentary are those of GLC Asset Management Group Ltd. (GLC) as at the date of publication and are subject to
change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell
specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any
investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances.
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