What Crisis? Think “Market Transition”

Labour Day! For many people, Labour Day, even more than New Years, represents a turning page, a new chapter, a shift or a change. I am a New Year’s Eve baby (Yes – Millions of people around the world celebrate my birthday and never send me a card), so this represents more than simply a new year to me. But when you ask the average person, Labour Day and September brings about a more emotional response than New Years. Why is this?

September seems to be a time of year that catches many people in the grip of change. For some of our readers with school age children, this is the start of a new year. There is the challenge of dealing with a new grade, perhaps new peers or teachers. Remember the transition from grade school to junior high, and then becoming a ‘minor niner’ in high school? On a personal note, our four kids graduated from high school in June and now find themselves on the cusp of a gap year that will allow them the opportunity for international travel. Think of the transition into and out of college or university. Even those in pre-retirement or retirement look at September with a sense of change or transition, when new programs begin. Even though summer is still with us for a couple of weeks, we consider Labour Day the transition into fall. Fall, winter, spring and summer: all of life is an ongoing transition – a time of change. But many of us do not accept change willingly. Change is to be avoided at all costs, isn’t it?

Some changes are expected far in advance and yet catch up to us suddenly. This is where my wife Keri and I found ourselves 18 years ago, when four little ones appeared at our door one day in September 1997. They were expected – but we had no idea of WHAT to expect! Now 18 years later, expecting that they would one day graduate from elementary and high school, we find ourselves in an unexpectedly, expected place. Where did the time go? I have been preparing for this day (financially and emotionally) for a long time, and yet find myself wholly unprepared for our new adventure. Does this resonate with anyone else?

When you find yourself in times of transition, how do you approach that change? Is it with dread, fear or anxiety? Do you retreat into yourself, cocooning trying to avoid reality? What questions do you ask? What answers do you seek?

There is little doubt that the recent market volatility has raised some concerns. It was supposed to be a quiet summer. The markets represented by the TSX Composite and S&P 500 had traded in a very tight trading range. The S&P 500 Index had traded between 2130 and 2050 from early June until August 18th. I am using the S&P 500 Index as a reference point because it is far more diversified than the TSX Composite index and represents a broader and better gauge. I left for a holiday on the beach and a “rip tide” hit the markets. Between Wednesday August 19th and Monday August 24th, the S&P 500 dropped by just over 10% from 2080 to 1870.

Rod, Lara and I are voracious readers of financial commentaries. What I find helpful in reading multiple comments, remarks and interpretations is that it allows us to shape better questions. I have found over the years, that my best responses to market behaviour was when I took the time to really consider the questions which should be asked, rather than running ahead trying to answer questions that cannot be answered. While on vacation with the family enjoying Virginia Beach, I took the time to write some notes, observations and insights to the team back in the office on August 25th to help them answer questions that arose in conversations with clients.

  • Bear markets occur after an extended period of excess. Is this the case in North America? I do not believe that North American markets specifically or global markets generally have been in a period of rapid appreciation or have seen a noted acceleration in markets. The global economy is recovering we believe, but it is doing so in a sluggish way. The US Federal Reserve (Fed) has been straining since the end of its ‘quantitative easing’ to know when to begin to raise interest rates even by a measly 25 basis points. They are consistently saying that the conditions could exist to allow them to raise interest rates, but that the conditions aren’t ideal. In Europe, the European Central Bank (ECB) has lowered interest rates to support growth. In Canada, the Bank of Canada (BOC) has lowered interest rates because of the concern that the drop in oil prices could derail growth.
  • The rare exception in the world markets has been – China. The chart on the next page, represents a year-to-date picture of China’s leading market index, the Shenzhen. At the beginning of 2015, the Shenzhen traded at 3258 and by June 15th it had climbed to 5178 up by 58.9%. The Shenzhen market is not open to global investors, only to Chinese nationals, and was fed by speculative lending practices. After June, the Shenzhen dropped over a period of weeks back to 3400. On August 18th, the Shenzhen began to fall by another 25%, moving from 4000 down to below 2900 before beginning to stabilize.

Market pundits pointed to this rapid drop as proof that the 2nd largest world economy was headed for serious pain. Allow me to take a short detour here and take a look at two of the world’s fastest developing economies, China and India. In my spring commentary about my trip to India, I high-lighted Prime Minister Modi’s focus on “Make in India” which is an economic focus to become more than a technology hub and call centre for the world, but to become a make industrial economic power. India has a workforce that is ideally suited for this shift, but tectonic shifts like this take time. Similarly, China has been a supplier to the world of low cost goods. China however, has been trying to turn itself from an exporting economy to a consumer economy. The other major consumer economy in the world is the United States, and this consumer focus has been the mantra of bull markets for decades in the US. No wonder China wants to replicate a consumer economy for its own people. This, however, takes time.


 

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