Wow! The third quarter was very emotional. Although the summer rally offered many windfalls for investors, it was short-lived. We are finally putting an end to a negative third quarter as well as a month of September that will end lower. However, in our opinion, it is important to stay on course. Still, good diversification, patience, and cool-headed market analysis can bring several opportunities without panicking and emotionally selling.
The Autorité des marchés financiers has analyzed the data from the last crises showing that despite the wind of panic that can inhabit us in negative times, history has demonstrated that with each crisis, the market has recovered its gains and offered patient investors with attractive returns over the following years.
Source: AMF and Thomson Reuters
The current downturn remains a moment of opportunity. According to the chart above, the returns during the last stock market rally show more interesting long-term gains than the drop recorded at the lowest peak. The crisis we have been experiencing for some time is temporary and will become a thing of the past over the next few months.
“An index that registers a low of -35% remains a rather exceptional event in a market cycle. The S&P 500 price earnings is back to normal, but still higher as opposed to recent crisis lows. On the other hand, the American economy is increasingly concentrated around the technology sector, which was not fully mature during the last crises. The best example is Apple, who was a small player during the technology bubble in 2000, whereas today, the company is one of the major players. The technology sector was still not mature, whereas it has now reached adulthood," said our president and portfolio manager, Philippe Pratte.
“It is rare for an index to reach this level, which means that it is a time that is starting to be favourable to make purchases. The more fear there is and the longer the bear market continues, the more long-term chances there are of making money," adds Philippe Pratte.
In short, according to seasonal trends, the fourth quarter of the year is usually the best performing one. For example, over 10 years, the S&P 500 has averaged a 4.60% return while the TSX has accumulated a 1.60% gain. We have strong confidence in a rebound in the fourth quarter.
The first signs of a potential rebound are beginning to appear on the horizon. The Federal Reserve has been clear on its intentions and as soon as we experience a decrease in inflation less than expected, the market should register significant growth. At this time, we are also seeing a decline in demand for long-term equity market protection, as the cost of stock-level insurance (put options) begins to lower and their long-term buying volumes are declining.
Investor’s pessimism is at an all-time high and nearing the top recorded in the latest crises. Moreover, the oversold condition of the markets also suggests a potential rebound. We believe that good news, given the current geopolitical and economic situation, could trigger a rally.
Markets in brief
Volatility was still around this week. Having started the week down, the three major US indexes finally recorded gains on Wednesday. Wall Street took a beating on Monday and Tuesday after the fall of the pound sterling which created an atmosphere of nervousness on the markets. The pound lost nearly 3.6% against the U.S. dollar on Friday and continued its decline on Monday, hitting a low of $1.04 early Monday morning in London.
This sudden drop is explained by the publication, last Friday, of the new budget from the new British government announcing a panoply of tax reduction measures which should total 45 billion pounds sterling in the years to come. These new measures made investors nervous regarding massive government indebtedness and the effects it will have on demand as well as inflation.
The surprise intervention by the Bank of England on Wednesday, who announced that it would buy back outstanding government bonds in an attempt to firm up the market, succeeded in stabilizing both American and European markets.
Here is the average for the week of the three main indexes at 1 p.m. Friday.
Dow
S&P 500
NASDAQ
And here's the average for the week for the TSX in Canada.
Oil
Oil prices were heading for their first quarterly loss in two years on Friday, dragged down by a possible global economic slowdown that could affect demand as well as the rising US dollar. A weaker greenback makes dollar-denominated oil cheaper for buyers holding other currencies, improving demand for the commodity. In short, these two factors have overshadowed the prospect of tighter supply as aggressive central bank rate hikes cloud the outlook for global growth.
West Texas Intermediate futures climbed Friday to trade near US$82 a barrel but are still expected to register a 23% decline for the final quarter.
The next meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its allies will be held on October 5 to discuss the level of production for November. Analysts expect lower production from member countries, a meeting to follow next week.
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
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