Market Commentary Q2 - 2008
As a result of continuing market volatility throughout the second quarter, our core portfolios generated a gross return representing a small decline over the previous quarter. Portfolios once again kept pace with key domestic and global indices, which were largely down. Our 60 equity/40 fixed income portfolio returned negative 1.49%.
Rising commodity prices, inflation fears and persisting concerns over the health of the economy in the United States drove many of the world's markets down during the quarter, particularly in June.
At home, the Canadian equity asset class was the top performing during the second quarter. The S&P/TSX returned 9.1% for the quarter. The International (MSCI EAFE) and the US (S&P500) indices returned -3.0% and -3.8% respectively in Canadian dollar terms.
With the recent market volatility, this is an excellent time to review your strategy and approach us for a no obligation, second opinion. We understand your business and work exclusively with aggregate and road builders across Canada and we only work with those individuals and corporations when we can add real value to their current situation.
Dismay at the Pumps Fueling Home Vacations?
While soaring commodity prices represent cost increases--and tightening profit margins--to many of the world's economies, they helped to drive the resource-rich Canadian market. The 25.1% and 17.5% returns posted respectively by the capped energy and materials sub-indexes of the S&P/TSX Composite Index illustrated this effect. These returns were driven by the global demand for energy, metals and agricultural commodities.
Many consumers and investors contemplated a summer of vacationing at home as oil crossed the $140 per barrel threshold in late June. This also pushed up the prices of cheaper alternatives like coal and natural gas. Demand for industrial metals such as iron ore and copper grew as the quarter ended.
Most foreign equity categories fell during the quarter. The only sector-diversified foreign equity categories to post gains were U.S. Small/Mid Cap Equity with 2.5% and Japanese Equity with 0.3%.
Bear Stearns Rescue Brings Fleeting Optimism
In the U.S. during April and May, the market was buoyed by optimism resulting from the Federal Reserve's (“Fed”) rescue of investment bank Bear Stearns in mid-March and from attempts by the Fed to add liquidity to the financial system during the first quarter. However, the May employment report unnerved investors and fanned flames of a possible U.S. recession.
Also weighing on investor sentiment in June were growing fears of inflation. Elsewhere, home prices continued their decline. A weaker jobs market, rising inflation and sagging home prices all contributed to slumping consumer confidence and falling stock prices to end the quarter. The financial sector’s performance worsened in June, particularly in the U.S., where the financials sub-index of the S&P 500 fell almost 19% [in US$].
Law of Averages
Let us say you are sitting in a first class seat on a flight from Toronto to Los Angeles, a distance of some 2,168 miles or 3489 km. I am driving on the QEW from Toronto to Oakville – a distance of some 19 miles or 31 km. Which of us is more likely to come to grief? And what is the mathematical relationship between the two probabilities?
The answer of course is, I am one thousand times more likely to come to grief on my trip than you are on yours. But it doesn’t feel that way, does it? We intuitively believe a plane crash is more likely than a car mishap, when the opposite is overwhelmingly more probable.
Mental Lapse
This is simply the most obvious example of a systematic mental lapse that the psychologist who postulated it – the late Amos Tversky – called the availability- heuristic. (A “heuristic,” is a consistent misapprehension of probability by a significant percentage of the population. For instance, if we flip a coin ten times and it comes up heads every time, we are strongly inclined to the belief that that the odds are overwhelming that it will come up tails on the eleventh flip. Instead, every flip is 50-50.) For purposes of this discussion, let’s just call it “the availability fallacy.”
The availability fallacy often drives perceptions of financial risk. For instance, all of us have seen a one-day, 23% decline in the S&P 500, on October 19, 1987. But none of us has ever seen a one-day – or even a one-year – 23% increase in the Consumer Price Index. (Even in highly inflationary periods since WWII, that’s taken two years.) Market volatility is sharp, sudden and terrifying.
Erosion of purchasing power on the other hand is all but invisible on any given day. For this and myriad other reasons, Canadian investors vastly overestimate the probability that equities will cause them to suffer catastrophic principal loss. And they even more abysmally underestimate the probability that, over three decades of retirement, erosion of purchasing power will grind down their lifestyle. This is the availability fallacy at its most dangerous. The wise investor will constantly remind himself of this.
Markets Always Come Back
Markets may go down suddenly and significantly…but they've never stayed down. There have been three growling bear markets since the 1987 event – in 1990-91, 1998, and the great-grandfather of all postwar bears in 2000-20002. Yet the S&P is today about seven times higher than it was at the end of the 1987 decline. The effect of the declines has been negligible to nonexistent, in the career of the long-term investor.
By the same token, inflation very rarely goes up much in any one year…but it virtually never stops going up. In 1980, again in 1987, and again in 2008: the long-term, planning-oriented investor was and is well advised to worry much less about loss of principal than about erosion of purchasing power. The availability fallacy causes most people to do the opposite. I am here to help ensure you are not one of them.
Tour of Hope
Terry Fox's original van, which was found a couple of years ago in British Columbia, has been restored and is now generating community and media excitement. Working closely with Darrell Fox, brother of the late Terry Fox and the national director of the Terry Fox Foundation, Scotia McLeod approached Ford Canada, which has refurbished the 1980 Ford Econoline van that was Terry's home and command centre during his heart-wrenching odyssey 28 years ago from St. John's to Thunder Bay.
The van has now hit the road again, starting in St. John's, Nfld. on May 25 and will wrap up its journey in Victoria, B.C. in September when the tour ends. Scotia McLeod branches across Canada are participating along with many clients and friends in becoming part of this historical tour. My associates at the Uptown Branch have hosted a variety of very successful family events in the Toronto area and helped raise close to $100,000 as part of this cross-Canada Tour of Hope for cancer research.
The events involved fund raising activities at venues including Rogers Stadium (during a Blue Jays game), Nathan Phillips Square, Mel Lastman Square, Ontario Place, a private function at Craig Jarvis's house who is my branch manager and culminating in a golf tournament at Oslerbrook in Collingwood, July 23. For everyone who participated in any of these events, thank you. And in the words of Terry and now echoed by his brother Darrell, "Every dollar counts".
I wish you a pleasant summer season.
