This week we must start off with a somber tone, as we note the passing of former Minister of Finance Jim Flaherty. Mr. Flaherty was one of Canada’s longest serving finance ministers, only stepping down last month from the post he held since 2006. Jim Flaherty was a finance minister who, in our opinion, fought for the everyday Canadian; his introduction of the Tax Free Savings Account and pushing for stronger risk management when it came to mortgage lending are just two of his greater achievements. Regardless of personal politics, we think it is fair to say that Jim Flaherty was one of the good politicians and that Canada will miss him.
Several weeks back we wrote that corrections within the global capital markets are natural, normal and healthy. The problem is that the nature of human behaviour certainly does not make these corrections feel natural, normal and healthy when they are actually taking place. The market action to start this month has been no different, as predictions of a crash, thoughts of fundamental changes and the fear of black swan events once again coming over the airwaves. While there is a perception something might be different this time, we doubt there is anything different. In our view, the current correction probably has further to go as we enter a seasonally soft period.
Any time we see a correction within the markets during a long trending upward move we have to ask ourselves two key questions:
- Has something fundamentally changed?
- Has the intermediate-term trend changed?
Our US Strategist Tony Dwyer answered the above questions this way:
Fundamentally, nothing has changed. Until inflation goes up enough to make the Federal Reserve raise rates, our view is that the yield curve will remain steep (which is a good thing), the economy and corporate earnings will grow leading to higher asset valuations.
The US equity market is in correction mode – especially for those areas with the most speculations (i.e. biotechnology and technology). With the majority of S&P 500 index companies now trading below their 10 and 50 day moving averages, the market should be within earshot completing their correction.
In addition, our strategist made the following comment with respect to P/E multiples (price to earnings): “The median PE for top 10 capitalized S&P 500 companies is 14x. This compares to 62x for the top 10 capitalized companies in March of 2000, (now that is a bubble that leads to crashes). While there are clearly areas that have become extreme in valuation such as biotechnology or “new technology” (which we have not owned for our clients), from a broad perspective, valuations are still inexpensive relative to inflation and fixed income.”
Howard Marks of Oaktree Capital wrote in a letter to clients recently that exhibiting different behaviour than the general crowd is essential if you expect to have better results over time. If you expect to outperform the crowd you must be different from that crowd and avoid market darlings that the crowd says can’t lose. We have found that “can’t lose” usually goes hand-in-hand with “can’t win.”
Sometimes the easiest thing to do when investing in the capital markets is to follow the herd and convince yourself you are not wrong if everyone else is doing the same thing. The trait of selling when everyone else is selling and buying what and when everyone else is buying typically results in just below average results after costs. We believe that is simply not a recipe for success.
We agree with both our US Strategist and Howard Marks of Oaktree Capital in that we do not think things are different this time, and feel that doing things a little differently than everyone else will indeed result in better long-term results for you, our client.
Recently we have taken some profits where valuations have appreciated nicely and now appear expensive, in order to build up some cash balances. We will look to put those monies to work relatively soon but quite possibly when “the crowd” is saying something different.
We have ended the past few weeks with comments on current sporting events, and this week is no different. The Masters golf tournament is taking place in Augusta Georgia, and for the first time since 1994, Tiger Woods is not in the field. To give this some context, the last time Tiger missed the masters shares of Apple traded for around $7.00 – today they trade for $520. To all the golf fans among our readers, enjoy the tournament.
Have a great weekend.
Thank you for your trust.
As always, we welcome any feedback.
The Dekker Hewett Group