But volatile markets also create greater long-term opportunities.
Oil has continued to slide, which has pressured Canadian energy stocks and, in recent weeks, even U.S. and international stocks have pulled back. The reasons for the market turbulence are varied. For oil, it is mostly a supply problem, as U.S. oil supply over the past several years has been robust and a year ago Saudi Arabia decided it would no longer support crude’s price through production cutbacks. Now, with sanctions on Iran being lifted, that country will add its production to global supply.
Outside the energy sector, the reasons for the stock market correction include: a) China’s economy is showing signs of slowing; b) the U.S. central bank recently raised its lending rate for the first time in six years, which has historically caused stocks to temporarily retreat; c) corporate earnings growth has slowed.
After a six-year bull market during which U.S. stocks rose about 230%, the 12% pullback from those record levels should be seen as a healthy consolidation. While further volatility is always a risk in the near term, we try to stay focused on the longer-term picture. Looking at U.S. stocks, the average yield on stocks in the S&P 500 index is now greater than the yield on the U.S. 10-year bond. From a valuation perspective, stocks are trading below their 25-year average price-to-earnings levels. These are positives, in our view.
It is also important to look at the situation from a portfolio perspective. While many stocks have pulled back, government bonds have risen in value, offsetting some of the declines in stocks. Also, strong international currencies, particularly south of the border, have meant that shares of companies outside our borders have actually risen in Canadian dollar terms. These exemplify the benefits of diversification.
While stock market declines can sometimes be unsettling, it is essential to remain focused on your long-term objectives and avoid becoming sidetracked by short-term market fluctuations.
Please feel free to contact your advisor if you have any questions or would like to review your portfolio.
