Another manic Monday?
Ron Tarter is a licensed investment advisor at Planmar Financial Corp. in London and a third-year Western student. He would love to address your questions! Send queries and comments to firstname.lastname@example.org.
Two days ago, global equity markets fell into turmoil. There is a light at the end of every tunnel and this short path was on the road map.
When the Toronto Stock Exchange plummeted 434 points on Monday, the media coined it the largest point loss in history. But in terms of per cent, it was a normal and healthy reaction in a protracted bull market.
The TSE fell 6.2 per cent two days ago in comparison to the Oct. 1987 crash when the TSE 300 Index fell 11.1 per cent.
Last week, over-valued Asian equity markets began to tumble prompting similar behaviour in other global stock markets. The influence of Asian markets, in particular Hong Kong, created a psychological hysteria in North American stock exchanges, leading to the correction early this week. The sudden drop in stock markets will probably be temporary, as economic indicators show the North American economy continues to grow at a steady rate.
When purchasing an equity or mutual fund, you invest in the value or earning potential of a particular corporation. In most cases, stock market corrections will not effect this underlying value. The current correction is the result of an over-reaction in the market rather than a change in the real value of companies.
Overall, the TSE has done well over the past year. When it closed early on Monday afternoon, the TSE 300 index was still up 11.3 per cent for the year. The Dow Jones Industrial Index has risen approximately 115 per cent during the last three years, so it is not abnormal for it to fall 7.2 per cent on Monday. If you do the math, it still nets 108 per cent growth over the past three years. Perhaps investors have been spoiled by the phenomenal returns this bull market has provided.
Yesterday, the TSE 300 index rebounded 137 points to close at 6736.30 while the DJII rose a record 337 points to close at 7498.32. The Canadian markets can be expected to recover slower than our American counterparts for several reasons. Unlike the United States, many Canadian publicly traded corporations are closely tied to commodities.
Commodity-based business will be affected by foreign markets because much of revenues generated by these corporations are from international trade.
Furthermore, the Canadian dollar suffered a significant loss Monday dropping $0.49, followed by a $0.25 yesterday to close at 0.7111 $US. Despite monetary intervention by the Bank of Canada, the dollar continued to slide. It is likely the Bank of Canada will raise interest rates in the near future, possibly when equity markets become more stable. A rise in interest rates will stagnate the recovery of the equity markets as investors may shift to fixed income securities.
In spite of what appears to be the beginning of a speedy recovery, I would expect the TSE to remain volatile for the next week.
The financial events of the last two days are unfortunate, but they provide opportunity for those who can promptly invest in the markets. As the dust begins to settle, portfolio managers will be picking out the bargains. Essentially, the stock markets have just gone on sale. Those who invested after the crashes of 1929 and 1987 reaped the rewards, just as the patient investors of the October 1997 correction will.