As we wrote last week, corrections are only considered “natural, normal and healthy” until they actually happen. We have seen the market correction continue throughout this week, but remain confident that it is temporary. As mentioned last week, due to tactical backdrop, historical precedent and positive fundamental backdrop further weakness should be made up very quickly – and then some.
The current market environment can cause investors to become nervous, leading them to temporarily de-emphasize valuation with regards to the investment decision making process. Our core values remain anchored around the basic premise that a company’s valuation, balance sheet, profitability, etc. are much more powerful and consistent predictors of future returns over the longer term. Accordingly we remain focused on those company fundamentals and are looking to exploit the recent market fluctuations in share price for your longer term advantage.
Our readers know that over the course of the late spring and summer we have been speaking about and preparing for this correction, and that our primary equity focus remains on buying companies that are inexpensive. We remain confident in those core values and have begun putting some of the built up cash balances to work. Simply stated, long-term historical behavior leads us to expect that our investors’ patience, of which we are most appreciative, should be rewarded over the next several months/quarters.
Last week we noted that market-stress indicators were pointing towards risk aversion not seen since August 2011 when equity markets incurred their last meaningful correction. What most investors tend to forget is that the six month period following August 2011 saw the S&P TSX rise 8% and the S&P 500 rise 10%.
While history rarely exactly repeats itself, it does quite often look similar. A selling climax tends to mark the last event in any market decline, and is typically a day when over 90% of stocks close lower than the previous day. Yesterday we saw 484 of the S&P 500 stocks, all 30 Dow Industrial, and 212 of the 251 S&P TSX stock close lower. Thus we feel we are seeing this selling climax and that we are in the midst of the equity markets completing their current correction.
This morning we saw Canadian economy create nearly 75,000 new jobs last month, moving our jobless rate to the lowest in almost six years. The bulk of these gains were in full-time employment within construction, natural resource accommodation and health care. These tend to be higher paying jobs, which should be expected to translate into stronger consumer spending as well. Last Friday we also saw employment data in the United States improve to their strongest levels since 2008. We keep coming back to our longer term thesis that North American economic fundamentals remain constructive and we view the current environment as an opportunity to add value.
A frequent commentary we hear at times like this is that there is always someone saying they called the decline and sold everything months ago. While market timing and speculative trading make for fashionable water cooler talk, in reality most are not successful at it. Our analysis has been that market setbacks occur approximately once every 4 to 5 years, and we have found it far more prudent to own great companies throughout the entire business cycle, rather than trying to time the market.
Thank you for your trust.
As always, we welcome your feedback. Have a great Thanksgiving long weekend.
The Dekker Hewett Group