For those of us in the financial industry, and in fact all investors, September 15th marked a milestone. Ten years ago, Lehman Brothers became insolvent and closed its doors, signaling heightened weakness in the global financial system and its potential collapse.
We all know how things turned out, and while painful, the efforts of Ben Bernanke and others were able to stem the bleeding and stabilize the economy. Quantitative easing led to what is now the longest US bull market since WWII and the second longest business cycle since 1945.
Now, trade concerns and market volatility remain front and centre of investors minds. Headlines in the press are cautioning for a looming market correction, while the Fed is continuing its gradual interest rate hikes. Will this bull market die of old age?
While this is the second longest US business cycle since WWII, the speed of the recovery from the 2008 global financial crisis has been unusually slow in comparison to recoveries from previous recessions. In the US, actual real GDP exceeded potential real GDP last year, which means excess capacity in the economy has been eliminated for the first time in over a decade. Corporate earnings continue to be strong year over year.
Looking at the overall economic barometer, the global economy is on solid footing and still has room to grow. Labour markets are strong in developed markets and wages are slowly increasing.
While in the US we see strong markets and solid employment levels, we are only now seeing signs of wage pressures: inflation, while not material is slowly increasing. Back home, we have yet to return to the heady days of resource driven markets. While financials continue to perform, the broader Canadian market has been a global laggard. Canada has yet to demonstrate efficiencies or the ability to get our assets to market, while the Americans have become the world’s largest producer of oil.
Does this mean you should avoid the Canadian market within your portfolio? I would argue not for two reasons. The first is you should always have assets weighed to some extent where your liabilities are located and if you reside in Canada you require Canadian assets for living expenses, including Canadian dollars.
Secondly, there are opportunities in all markets requiring that you look not just to currency, but to the company fundamentals in which you are investing. Although the Canadian market is concentrated in energy, financials and materials, some companies within these sectors are leading global organizations.
While it may not capture the full market upside, downside protection is what we are focusing on at this point in the business cycle. Our asset mix decisions and selection of quality companies position our portfolios to protect on the downside.
There is certain to be another market correction, though at this point there is no reason to believe it will be as abrupt or as deep as 2008. The next correction may not be coming up quickly, but it is on the horizon, and preparation and solid foundations are going to be key.
While Lehman Brothers may be far in the rear-view mirror, we need to be cognizant of risks and ensure that portfolios are managed to mitigate them, while ensuring our clients’ expectation and comfort of risk aligns with their investment policy.
Please speak to your investment counsellor should you have any concerns regarding your asset mix or overall portfolio.
Wishing you a warm Thanksgiving and enjoyable fall season.
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