“Prediction is very difficult, especially if it’s about the future.”
Niels Bohr, Nobel Prize in Physics (1922)
World stock markets ended September on a bit of a pullback. It seems markets almost always get a bit shaky at this time of the year. I have never heard a good justification for the seasonal weakness and this time is no different. Yes there were some weaker economic numbers, especially one coming out of Germany that rattled confidence but nothing to justify the current volatility. And certainly the Ebola headlines took a toll but really I think we are just having an ordinary correction which is long overdue. Markets had been incredibly resilient to bad news earlier this year but suddenly the glass is “half full”. When sentiment reverses, greed turns to fear in a heartbeat.
As I have pointed out several times, the US stock markets have been long overdue for correction. We have enjoyed a period of low volatility and reasonably good corporate earnings which have resulted in stock indices grinding higher. Valuations are still very reasonable especially in light of interest rates which are unexpectedly lower today than at the start of the year. But while it is easy to expect a correction, it is very difficult to accurately forecast the timing of a correction. Wouldn’t it be great if we could only experience the upside of good markets and step to the sidelines before corrections take their toll? We all know this is not achievable, yet with each market downturn, the business media and market “experts” seem to imply that market timing is absolutely a repeatable skill that one can master. Somehow these individuals have figured out how to predict the future but they still have time to appear on television!
I said in my last letter that I remain concerned about what lies ahead after the US Federal Reserve retires it’s 3rd round of Quantitative Easing later this month. Markets had been expecting Europe to announce their own version of “all in” QE in October but that was delayed and I think part of the recent market volatility was around worries about liquidity draining faster than we expected. Europe is still expected to go forward with a full scale QE and Japan is likely to also keep printing money for a long time to come so there will be lots of liquidity sloshing around. But one goal of printing money is to devalue the currency so if the USA is done (for now) with QE and Europe and Japan are ramping up their programs, this will likely lead to a higher US dollar. Unfortunately this is not supportive of commodity prices and much of the Canadian market. So on balance, I have been converting a bit more cash to USD and will be looking to add to positions over the next few weeks as we get through the US midterm elections. From an historical perspective, the 6 months following the elections are a very productive time for investors!