Good afternoon,

With October nearing a close, we thought we would offer some thoughts and insights on what has been a volatile month for stocks and bonds.

Both Canadian and US stocks have experience downside volatility this month. While the US market is now roughly flat, the Canadian market is down year to date approximately 8%, with very few sectors or stocks insulated from this movement. Further, bonds, which normally provide a buffer of sorts against stock market weakness, have struggled this year as rising interest rates have impacted bond prices.

We would attribute the weakness in stock and bond prices to two things:

• Interest rates have been on the rise largely because the economy (both in the US and Canada) has been strong. As rates rise, financial conditions, which are basically the cost of borrowing, the demand for new loans and the banks willingness to lend, begin to tighten.

• Trade, especially as it relates to the US and China, remains a concern. While most of the trade overhang has been posturing by both sides, in October, for the first time, we saw company earnings negatively impacted by tariffs.

The knee-jerk reaction might be to draw parallels to 2008 and to assume things get worse from here. In our view, this would be misplaced. Unlike 2008, the economy is strong and banks are well positioned. Corporate earnings continue to grow (despite the tariffs) and most companies have easily manageable levels of debt (again, unlike 2008).

As for the aforementioned financial conditions and trade, we would add a couple of thoughts:

• While interest rates have risen, the cost of borrowing remains historically low. Further, bad loans, which can become problematic for banks and by extension the broader economy, remain at very low levels. In other words, people continue to pay their bills.

• Trade is a bit harder to predict, but as we have seen with other disputes such as NAFTA, resolution with some tweaks remains the most likely outcome in our view.

We would be more concerned if the foundations of the economy (employment, wages, investment) were weaker or if corporate earnings were no longer growing, but neither is the case. We would also add that market corrections (typically declines of around 10% from prior highs) are not all that unusual, generally occurring two out of every three years. In fact, since the end of the Financial Crisis, the US and Canadian markets have both had four previous declines of at least 10%, including one earlier this year.

We understand that these times can be nerve-racking and we would be happy to discuss your investment plan either over the phone or in person to not only offer some reassurance that the plan is sound, but also to discuss whether any adjustments might be warranted if your objectives have changed. One of the positives of sell-offs such as these is that good businesses with strong management teams and growing dividends tend to “go on sale” with the rest of the market and as things settle down, we will look for opportunities to adjust portfolios to take advantage of what we view as compelling entry points.

Please find attached the following articles that we thought you may find of interest:

Global Weekly Insight – Coping with the mercurial market:

The market's mood swings have been unsettling, but the underlying conditions that triggered the rout are unlikely to shatter the economic or earning cycles.  We think this will sort out, but it will take some time. 

CLICK HERE to read more

Daily Economic Update:

Hawkish BoC hikes again, says rates will have to rise to a neutral.

                  CLICK HERE to read more

 

 "Based on my own personal experience - both as an investor in recent years and an expert witness in years past, rarely do more than three or four variables really count.  Everything else is noise."

~  Martin Whitman  ~