|
J.C. HOOD INVESTMENT COUNSEL
INC. |
Hello Everyone:
Housekeeping/Holiday Next Week: You cannot predict when markets will become more volatile except, of course, when I am going on holidays. We will be away Feb 3-7, but I will have my laptop in tow and I will be calling in for voicemail. If you need further assistance please call Dave Tait at 705-773-2521 or NBCN 800-361-8688-3642 and ask for David or Gio.
RRSP Reminder: Thanks to the early birds who have already made their contributions.
Markets and Volatility: I have often remarked in the newsletter that I was anticipating a normal market correction which never really materialized, at least in the U.S. Last week’s volatility of about 3% indicated that the correction might finally occur. I would have viewed this positively as a buying opportunity in the U.S. market and, to some extent, in Europe and the TSX. So let’s try to understand what roiled the markets.
What occurred last week is what is known as a ‘risk off’ trade, a general nervousness about markets in general. This was precipitated by weakness in Chinese markets which hurts commodity producers and is generally negative for global economic growth. Secondly, the Argentine peso dropped 15% last week joining several other declining emerging market currencies over the past year. In the U.S., reducing QE leads to higher interest rates making the USD more attractive, emerging market currencies less so, hence the selloff in emerging markets.
But a reality check is due--the U.S. markets have experienced many such ‘risk off’ trades since the financial crisis, whether Greece, European bank stability, government budget stalemates, etc. and yet the U.S. markets, which we have held consistently, have done remarkably well! In fact, last week, 15 of 20 S&P500 companies beat earnings estimates and this continues this week as well. Today, consumer confidence ratings also beat estimates. So when there is further volatility, keep in mind that this is not a ‘Black Swan’ event but a normal correction that we will take advantage of U.S. markets which have largely recovered from last week’s decline.
Canadian Markets: The TSX has not recovered like the US because we still have some very real problems. It is certainly evident in our declining CDN dollar, although this will certainly be a boost to exports. I remain bullish on the CDN banks and oils and on a recovering U.S. economy to drag us along.
If you have any questions, please don’t hesitate to call.
THANK YOU FOR YOUR
BUSINESS
John
Member of the PORTFOLIO MANAGERS ASSOCIATION OF CANADA
And the CFA Institute