Current market situation
These events have heavily impacted the markets, most of which have signifi cantly retractedthroughout the world.
- The U.S. S&P 500 Index has fallen 14% since the beginning of the year, with even greater declines (-18%) in the MSCI World Index.
- The Canadian market is experiencing one of its most volatile periods in 10 years. It is worth mentioning that our market heavily relies on the resource sectors, and the decline in the prices of raw materials has been signifi cant since the beginning of the year. The S&P/TSX Index fell 13% in 2008, 14% in September, and 18% in the third quarter.
- It is important to note that the situation is less alarming for the bond market, favoured in the wake of an economic slowdown and the search for safe securities in a tumultuous situation. In fact, the performance registered by the Canadian Dex Universe Bond Index is 2% year-to-date (September 30).
The Worst Market Crash Since 1929?
Not Quite! Of course we are in the throes of a serious Bear market but that’s not a reason to make things worse than they actually are. In fact, going back to 1956, there have been no less than three bear markets as bad, or worse than what we are currently experiencing (at least as of the close of markets on October 9th).
| Date | Peak to Trough Decline – S&P/TSX | # of months | Catalyst |
| 10/1980 – 06/1982 | -43.1% | 19 | Récession |
| 08/2000 – 09/2001 | -39.2% | 13 | Tech Bust |
| 10/1973 – 09/1974 | -37.3% | 11 | Recession, Oil shock |
| 05/2008 – 10/2008 | -37.3% | 5 | Global financial crisis |
| 05/1957 – 12/1957 | -28.7% | 7 | Recession |
| 05/1969 – 06/1970 | -28.3% | 13 | Recession |
| 04/1998 – 08/1998 | -27.8% | 4 | Asian Flu |
| 07/1987 – 11/1987 | -26.1% | 4 | 1987 market crash |
| 08/1989 – 12/1990 | -23.2% | 14 | Recession |
| 03/2002 – 09/2002 | -21.3% | 6 | Accounting scandals |
Based on this, we caution against categorizing the current crisis as different from those that preceded it, and thinking that conventional investment principles no longer apply. We are in the liquidation phase of a Bear Market – a phase during which sentiment is at its blackest, and the temptation characterize the seriousness of the Bear market as unprecedented is always at its greatest. Of course, each Bear market has its unique set of circumstances, but this doesn’t mean you should throw the baby out with the bath water. Basic investment principles – including avoiding selling at or near the bottom – still apply.
BCA Research has studied how markets responded following similar periods of massive liquidation since 1965, and here is what they’ve found: On average the S&P 500 rose 6.7% after one month, 7% after three months and 15% after six months. Bottom line: while we may not have hit the bottom and there is sure to be still more pain ahead, if the past is any guideline, rewards await investors who have the fortitude to wait out this liquidation period.[1]
As at October 1st, 2008.
- The global economy and fi nancial markets have been grappling for more than a year with a widespread move to reduce the level of indebtedness. Many recent events encompassed in this heavy trend have led to marked volatility within the markets.
- The global economic slowdown, the decrease in U.S. real estate, the credit crisis, and the redirection of recent trends related to resources has created much turmoil and worry on the markets.
- The recent diffi culty experienced by major U.S. fi nancial institutions adds to the list of controversies. At the beginning of September, the U.S. Treasury came to the aid of mortgage lenders Freddie Mac and Fannie Mae. Many other important U.S. financial institutions sought bankruptcy protection. While some benefi ted from great rescues, others were forced to cease all activity. Bear Sterns was bought over by JPMorgan, Lehman Brothers no longer exists, AIG took out a loan worth $85 billion from Fed, and Wachovia was bought out by its competitor Citigroup.
- Strong and unprecedented interventions were carried out by the monetary and U.S. tax authorities in order to extinguish the impact of the current crisis. Beyond budgetary measures, the Federal Reserve has reduced its offi cial market rate by 2.25% since the beginning of the year, and has succeeded to rescue the fi nancial sector in many ways.
- The liquidity crisis is bearing heavily on Europe. Four European banks were subject to bailouts. One of the last victims of the crisis was Hypo Real Estate, the fi fth major German bank, receiving a loan worth 35 billion euros from the government and from four other banks to ensure the continuity of the company’s operations.
- Another shock to rattle the fi nancial environment came on September 29, as the U.S. Congress turned down a plan to bailout banks. The plan sought to add liquidity to the banking system to get it back on track and improve credit market conditions. By eliminating the worst debts held by fi nancial institutions, the plan intended to restimulate inter-bank exchanges.
[1] Material excerpted from John Heinzl’s article Here’s How The Good News: History (Usually) Repeats Itself, Globe and Mail, October 8, 2008, page B12.