August 24, 2015 Newsletter

Dear Friends,

Tangents:

Advice After Stock Market Drop: Take Some Deep Breaths, and Don’t Do a Thing

                                                                                                -by Ron Lieber

The impulse when the stock market falls hard for a few days in a row is to do something. Anything. Our life savings are often on the line, after all.

But that’s just the thing: Stocks are most useful for long-term goals. So unless those goals have changed in the last few days, it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity.

So pour yourself a drink, or sit down with a pint of ice cream, and consider the following six things.

First, you are not the stock market. Chances are, your portfolio is a diverse mix of investments. Many people save in target-date mutual funds that do the work of diversification for them. Vanguard’s 2035 fund was down 4.6 percent last week, better than the 5.77 percent decline in the Standard & Poor’s 500-stock index from where it closed a week earlier.

Second, if you have been investing in stocks in the last six years, you most likely are a big winner. It’s generally a bad idea to look at your investment statements too often, but take a quick peek.

That outsize gain you see is one reason you are in stocks in the first place. Plenty of research shows that if you miss just a few days of the market’s biggest gains, your long-term portfolio will suffer badly. If you decide to put a bunch of your money in cash this week, how will you know when to get back in the market? You’ll probably be looking for a sign, and that sign will be the very rebound days that you will have missed out on.

Still uneasy? Consider a third point: At some time in the past, when you were not scared, you made a decision to construct your portfolio a certain way. You knew that stocks involved risk and that the returns they have traditionally delivered, above and beyond what cash and bonds do, was the reward for your persistence.

Nothing about the events of recent days suggests that the fundamentals of capitalism have changed. So neither should your confidence in very long-term ownership of the pieces of the for-profit enterprises that benefit from your fortitude.

Nobody knows for sure whether we’re in for a decline in the stock market of 25 percent or more. But if such a decline does happen and you are a regular investor, you’ll be buying more when prices are lower.

How worried are you about the recent declines in global markets? Do you plan to change your investments?

Which brings us to point No. 4: Long-term investors have time to recover. I know too many 70-year-olds who sold all of their stocks in 2009 and are healthy enough to live to 100. They’d be going on a lot more vacations now and be worrying less about long-term care if they had held firm.

Worried about a 529 college savings plan for a 12-year-old? Hopefully, you weren’t 100 percent in stocks with six years to go before needing money for tuition. Still, you have at least nine years for a portion of that portfolio to recover from any sustained downturn. If that 12-year-old is the oldest of at least two children, you could use cash to pay some tuition bills for the eldest and let some of the account ride even longer for the next child.

Let’s say you still have trouble sleeping. Then you may be the sort of person who needs to consider a fifth point: Some people cannot handle the stress of investing in stocks. But try to give this more time, and consider the alternatives. There are few investments that can deliver the kinds of returns that stocks can without their own accompanying anxiety.

Another alternative is to save a lot more in safer investments like cash or certain bonds. Most people don’t have enough income to do that easily, so settling for lower returns will mean a combination of working longer and living modestly, forever. For some people, that is a fine trade-off.

One final point for new investors (and their parents and grandparents, who ought to be counseling them right about now): This is what markets do. There is absolutely nothing abnormal about what is going on here.

Most of us have to save somewhere, and history suggests that stocks are the most accessible route to get the returns you’ll need to retire someday. It would take decades of systemic economic erosion to prove otherwise, and a few days of market declines do not suggest that anything like that is upon us.

A version of this article appears in print on August 22, 2015, on page B2 of the New York edition with the headline: Take Some Deep Breaths, and Don’t Do a Thing. 

PHOTOS OF THE DAY

Tourists pose for photographs with the iconic statue of a bull in New York’s financial district Monday. Wall Street opened sharply lower with the Dow Jones industrial average losing more than 1,000 points following a more-than 8 percent drop in Chinese shares and a selloff in oil and other commodities. Lucas Jackson/Reuters

A TV camerawoman takes footage of an emergency exit at a multifunction station in the NEAT Gotthard Base Tunnel during a media visit near the town of Sedrun, Switzerland, Monday. The world’s longest train tunnel, which crosses the Alps, will consist of two parallel single track tunnels, each 57 km (35 miles) long. It should become operational at the end of 2016. Arnd Wiegmann/Reuters

Market Closes for August 24^th, 2015

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Eric Lam

     (Bloomberg) — Canadian stocks plunged the most in almost four years, joining a rout in markets around the world as the U.S. benchmark entered a correction and commodities stumbled to a 16-year low.

     Equities in the resource-rich Standard & Poor’s/TSX Composite Index sank as much as 5.7 percent as the market opened, the most since March 2009 on an intraday basis, as investors fled all but the safest assets in the world. Stocks then pared those losses by some three-quarters by midday before succumbing to further selling in the final two hours of trading.

     Brent crude slid to less than $45 a barrel for the first time since 2009 as the Bloomberg Commodity Index of 22 raw materials sank to a 1999 low.

     “Let’s be cognizant we’ve had a pretty remarkable week here of stock price movement and very rarely do we see that switch on, then switch off,” said Gareth Watson, vice president of investment management and research at Richardson GMP Ltd. in Toronto. His firm manages about C$28 billion ($21.1 billion). “We will see more volatility here before things settle out.”

     The S&P/TSX fell 420.93 points, or 3.1 percent, to 13,052.74 at 4 p.m. in Toronto, the most since October 2011. Trading volume was 64 percent higher than the 30-day average today. The benchmark Canadian equity gauge has fallen 9.8 percent this month, headed for a fourth straight monthly decline, the longest such streak since September 2011.                       

     Seven Canadian stocks triggered automatic trading halts today, including Hudson’s Bay Co., a record since the circuit breaker program was adopted in 2012, according to data from the Investment Industry Regulatory Organization of Canada. In the past, IIROC has only seen as many as six such halts in an entire quarter.

     A volatility gauge for 60 of the largest, most liquid Canadian stocks surged as much as 56 percent before paring the gain to 35 percent.

     The MSCI All-Country World Index of developed and developing markets tumbled 3.8 percent, the most since 2011. The U.S. benchmark S&P 500 plunged 3.9 percent, down 11 percent from its May high, while stocks in Germany entered a bear market and Chinese stocks tumbled the most since 2007.

     More than $5 trillion has been erased from the value of global equities since China unexpectedly devalued the yuan on Aug. 11, fueling concerns about global growth and the demand for commodities.

     “Canada was dealing with its own issues prior to the massive pullback in global activity,” said Andrew Pyle, a fund manager at ScotiaMcLeod Inc. in Peterborough, Ontario who manages about C$300 million. “A lot of that is tied to oil and the global rout in capital markets just compounds the problem for Canada.”

     Energy producers are the worst-performing industry in the S&P/TSX this year pacing declines with a 26 percent drop. Crude has slumped more than 30 percent from this year’s June peak amid concern global growth is slowing.

     Bombardier Inc., the second-worst performing stock in the S&P/TSX this year, sank 16 percent in heavy trading.

     “The markets are getting a little panicky and that’s what we saw at the open,” said Michael O’Brien, a fund manager and head of core Canadian equities at TD Asset Management in Toronto. His firm manages about C$333 billion.

US

By Anna-Louise Jackson and Joseph Ciolli

     (Bloomberg) — The Standard & Poor’s 500 Index fell into a correction for the first time since 2011 in one of the most volatile trading days ever, as a rout in global equity markets deepened.

     It was a day of wild swings as equities plunged at the open before staging a sharp rebound, with the Nasdaq 100 Index by midday nearly erasing a 9.8 percent drop. The Dow Jones Industrial Average dropped 1,000 points in the opening minutes of trading, while the S&P 500 tumbled 5.3 percent and then pared declines before an afternoon wave of renewed selling.

     The S&P 500 dropped 3.9 percent to 1,893.21 at 4 p.m. in New York, and closed 11 percent below its May record. The Dow lost 588.40 points, or 3.6 percent, to 15,871.35, after sliding as much as 6.6 percent. The Nasdaq Composite Index retreated 3.8 percent to its lowest level since Oct. 27, trimming an early 8.8 percent skid.

     “Investors in China have lost confidence in the central bank, and it’s a very alarming and difficult situation for the markets,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $110 billion. “It ultimately depends on whether the China situation results in a severe economic slowdown. It that happens, it’s going to ripple through the U.S.”

     About 14 billion shares traded hands on U.S. exchanges, the most in more than four years. It was the second-highest value traded ever, according to Ana Avramovic, a U.S. strategist at Credit Suisse Group AG.

     The Chicago Board Options Exchange Volatility Index rose 45 percent to 40.74, after an early 90 percent surge that temporarily sent the index to its loftiest level since January 2009. The gauge known as the VIX closed at a nearly four-year high after more than doubling last week.

     The Dow’s 1,089.42-point swing from its session low to its high is the biggest one-day net point swing in the average’s history. The 7.1 percent move between Monday’s high and low is the largest since the flash crash of May 6, 2010. Both the S&P 500 and the Dow posted their largest two-day declines since December 2008.

     The S&P 500’s rout sent valuations tumbling. The price-to- earnings ratio for the gauge sank to 16.76, the lowest level since the October pullback. Then, the measure bottomed just above 16.50, the cheapest since January 2014. The less-expensive shares enticed some buyers, as equities sharply trimmed their opening losses.

     “As prices go lower, we see selective opportunities to buy as opposed to a provocation to become more bearish,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, the private-banking unit of KeyCorp that oversees more than $25 billion in assets. “We’re emphasizing large-caps relative to smaller ones,” and within the U.S., companies that are less export-oriented.                          

     Calm in the U.S. market shattered last week, with volatility soaring by the most on record as the Dow entered a correction and investors dumped the biggest winners of 2015. Shares succumbed to a global selloff that’s wiped more than $5 trillion off the value of equities around the world since China’s shock currency devaluation on Aug. 11.

     The S&P 500 is on track for its worst August decline in 17 years. It sank the most since 2011 on Friday amid signs China’s economy is weakening, capping its single 5 percent decline of the year after spending the previous seven months locked in a trading range that had no precedent in a century of market history.

     Moreover, speculation had been building all year for the Federal Reserve to raise interest rates in September for the first time since 2006, following the end of quantitative easing in 2014.

     Traders are now pricing in a less than one-in-four chance the central bank will act next month, from about 48 percent just before the yuan devaluation, as the rout in equity markets has shaken confidence that the global economy will be strong enough to withstand higher U.S. rates.

     “The chickens are coming home to roost,” said Thomas Thygesen, SEB’s head of cross-asset strategy in Copenhagen. “We’ve been too hopeful that Fed tapering didn’t matter, that they could hike interest rates and we’d still have a healthy economy. Since the Fed stopped bond purchases, they’ve been choking the life out of global manufacturing and that matters most for commodities and emerging markets.”

     The retreat in global stock markets bears resemblances to losses that hit equities in 1998, when financial stress from Asia to Russia sent the S&P 500 down 19 percent, only to recover in three months, said Laszlo Birinyi, the president of Birinyi Associates in Westport, Connecticut.

     “I wouldn’t expect a mirror image but my point is that for all the negative things I’ve read this weekend, almost all of these have been comments by people who were bearish to begin with,” Birinyi said Monday in an interview on Bloomberg Radio. m“This is a short-term painful correction but when you have a situation where the market is well aware of the issues, the market has ability to correct.”

     All of the benchmark index’s main groups tumbled at least 3 percent today, with raw-materials shares approaching a two-year low while energy companies slumped to the lowest since October 2011. Citigroup Inc. and JPMorgan Chase & Co. fell at least 5.2 percent as banks retreated the most since June 2012.

     Only six stocks in the S&P 500 rose, led by AGL Resources Inc. The natural-gas distributor soared 28 percent after agreeing to be acquired for $8 billion in cash by Southern Co., the third-largest U.S. utility owner. Southern slid 4.9 percent.

Have a wonderful evening everyone.

Be magnificent!

The person who can wear the mantle of a Master

is one who is devoted to the cause of non-violence and non-possession

who is driven by the quest for truth and the right perspective,

who is capable of solving his own emotional and mental problems and

who can show others the way to overcome their emotional and mental problems.

Acharya Mahaprajna

As ever,

Carolann

Laughter is the sun that drives winter from the human face.

                                              -Victor Hugo, 1802-1885

Carolann Steinhoff, B.Sc., CFP®, CIM, CIWM

Portfolio Manager &

Senior Vice-President

Queensbury Securities Inc.,

St. Andrew’s Square,

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7