Financial market turmoil

Canadian equity markets have officially reached Bear Market status.

As I write this column, Canadian equity markets have officially reached Bear Market status – generally considered to be a drop of 20 per cent or more in a market index.

Many of us, our financial plans built on average total return expectations of six to seven per cent annually over the long term, can’t help but wonder – when will this current negative trend reverse? Although no easy answer exists, history can perhaps provide some reassurance.

Since the mid-‘50s the TSX Composite Index has experienced 12 bull markets. The average duration was 44 months with an average gain over each upturn of 120 per cent. During the same 55 years, we have experienced 13 bear markets with an average duration of nine months, and an average loss of 28 per cent. Clearly, those who remained invested throughout this period have done very well indeed.

Our most recent experience occurred in 2008/2009. Over a period of just a few months, the market fell a dramatic 43 per cent. After only nine months of the worst recession since the great depression, the market turned bullish and rebounded by a spectacular 50 per cent.

Since March of this year, the TSX has once again fallen back into bear market territory. No one knows when the bottom will be reached. Predicting the timing of a traditional market turn is impossible. However, both events are bound to occur, as they always have.

It is important to remember that until we actually sell the securities, a downturn does not translate into a loss. In the interim, with a well-designed portfolio, significant dividends and interest continue to accrue and purchase more investments at the much lower market values. As well, those portfolios with a suitable component of fixed-income products moderate the overall negative effect of the equity market’s decline.

Different about the current decline is that corporate profits and dividends remain at all-time highs, with interest rates at all-time lows – not the usual environment triggering a bear market. The root cause of the current problem is twofold: one, clearly the procrastination of policy-makers in the U.S. to agree on a credible plan for managing their country’s deficit and debt problem; and two, in Europe, efforts to formulate and implement a credible plan to control and hopefully solve, the sovereign debt problems of not only Greece, but also Portugal, Spain and Italy.

Equity markets abhor uncertainty and political posturing in the face of major issues. We are seeing the result. One hopes the world-wide market reaction to this dithering by U.S. and European politicians will force them to act quickly and decisively. When they finally provide conclusive leadership, the markets will once again respond positively.

While we each must make financial decisions given our personal circumstances, much conclusive research has shown that investors who jump in and out of the market in an attempt to improve their returns usually achieve far worse long-term results than do those who stay the course. An attempt to time market turns is pure guesswork.

In the meantime I continue to wait, hopeful that history will once again repeat itself, preferably sooner rather than later. I take comfort in the fact that despite several major downturns over the last 10 years, the TSX Index has nevertheless produced an average annual total return of eight per cent.

 

 

A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, The Smart Canadian Wealth-Builder, is now available at Tanner’s Books, and in other bookstores.

 

 

The information contained in this column is for information purposes only. The investment and services mentioned in this column may not be suitable for everyone.

Contact an independent financial advisor before making any investment decisions.

 

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