Market Decline Brings Opportunity

Market Decline Brings Opportunity

Market volatility has returned with a vengeance. The markets had been unusually stable throughout 2017. It was actually record breaking stability, with the fewest number of days with one percent or more daily changes. Said another way it had the most days with small daily changes. This all changed these last two weeks, with some very interesting intra-day and day-to-day changes of up to five percent on the US market. Until February 9th’s late day rally the main US index, the S&P 500, was down about 10% from its peak, and the Canadian market was down a slightly more modest 8.4%. However, the Canadian market has been a severely underperforming market for the past decade, and sits right about where it sat in 2007 and 2008.

What does this all mean? It means OPPORTUNITY. My book was written during a period of high volatility, from the summer of 2014 to January 2017. The Canadian market experienced a full bear market decline of 25% during this timeframe. The US market didn’t officially enter bear market territory, defined as a decline of 20% or greater, but it came very close and experienced a number of days similar to what we had these past two weeks. If you read the book you will see how I took advantage, to bungee jump my portfolios out of the canyon, when the bear market came to an end.  What we have seen these past few days isn’t out of the ordinary. The worse it gets the better the opportunities will be.

While we don’t know for sure the root cause of changing market sentiment, it appears to have been around very strong US employment growth numbers, and the highest level of wage gains in quite some time, of 2.9%. What is perplexing is that economists had long bemoaned the lack of wage growth, so how did an improved wage growth number become such a big negative? The fear was that this would cause interest rates to rise faster than anticipated. Personally, I think it just was that the US market had been strong for a year and a half, and there are always periodic market corrections. Wage growth provided the excuse to sell, precipitating a correction. If it wasn’t wage growth, it would have been something else.  While it’s impossible to predict what will happen short term, let’s review what we know for sure:

  • The markets have returned about 10% per year for the past century and are likely to continue to do so for the next century, but it is not a smooth ride.
  • Many excellent companies are now selling at a price 10-20% below where they were in the recent past.
  • Corporate profits have been strong.
  • The US and world economies have been good and growth has been accelerating. Major bear markets usually coincide with recessions.
  • Dividend yields on many companies still exceed paltry interest yields, even though interest yields are rising. Many companies also increase their dividends annually, often by 5-10%.
  • The decline in stock prices has increased the level of dividend, earnings and cash flow yields, such that companies now trade at better valuations that they did just a short time ago.
  • Your money now goes further when buying stocks.

Nobody knows (see blog titled “Making Money is More Important than Making Predictions”) where the market is going short term, but as I have done before, I have already started trying to take advantage to the current market decline and plan to continue doing so. I personally would like to see another 10% or so decline to make the bargains better yet, but have no idea whether that will or will not happen. I never make major changes, just plan on slowly taking advantage of the current situation.

I will not write a blog next week and hope everyone enjoys a terrific Family Day.