September 2014 Market Update
At the time of this writing (Sept 26th, 2014) the S&P/TSX Composite, Canada’s main stock index dropped for a fifth straight session yesterday, near a three-month low and a total drop of nearly 3.8% in one week. Across the border, U.S. markets were down, with the S&P 500 and NASDAQ coming off highs earlier this month. European markets also saw declines.
These stock market declines are linked to weak economic data, geopolitical concerns, interest rate uncertainty and profit taking.
U.S. economic data is being viewed as sluggish, major European economies are showing either slower growth or even contraction, and employment numbers from China have not met expectations.
The recent conflicts and current tensions in Ukraine and Israel appear to be de-escalating. However, world leaders are now addressing the threat from ISIS and response needed in Iraq and Syria.
Earlier this month the European Central Bank cut interest rates and announced a program to stimulate the economy. The Federal Reserve cut its monthly bond-buying program, keeping on track to finish the program next month. The Fed expects rates to remain on hold for a considerable time after its quantitative easing program ends, it also projected a faster pace of rate hikes. The Bank of Canada is scheduled to update its monetary policy report next month with the latest quarterly outlook.
The U.S. dollar traded near its highest level in more than four years. A stronger U.S. dollar usually weighs on commodities and makes dollar-priced commodities more expensive for holders of other currencies.
Are we still in the bull market which started in March of 2009 but in the midst of another minor correction? Or is this the start of a more significant correction? Clearly, the recent market activity has investors concerned. They are deciding if they should sell before a larger correction begins and buy at the bottom. Realistically though, most investors are just not that good at market timing. Nothing is harder to predict than the peak of a market.
Our own portfolio strategy emphasizes asset class diversification and cash flow. This reduces exposure to the absolute volatility of the market and will minimize the maximum drawdown when compared to a pure stock market portfolio. The regular cash flow generated by our portfolio’s income-generating investments is reinvested regularly. As the value of these investments tends to rise and fall in the short term, this stream of cash flows helps rebalance and takes advantage of underweighted asset classes, like equities, when they are at lower prices, such as we’re seeing right now.