News from Greece continues to weigh heavy on the direction the markets seem to be taking.  The latest news over the weekend is that the Greek government conceded they would not meet deficit reduction targets previously agreed upon as a prerequisite for the next tranche of the bailout package, thus increasing the likelihood of default.

Despite a better than expected U.S. ISM Manufacturing report for September which caused a brief uptick in the market, U.S. and Canadian equities sold off sharply again on Oct 3. 
PMI (Purchasing Managers Index) data for September essentially confirmed that Europe is in fact in recession; although U.S. economic data suggests the U.S. has so far avoided that fate, its equity markets have already priced in a recession scenario.

Canadian equity benchmark indices have sold off sharply, not so much from concern about the strength of the Canadian economy, but more reflecting the risk of weakening global demand and thus lower prices for commodities, specifically energy and base metals, which represent almost 50% of the S&PTSX Composite Index.

There remains a significant disconnect between share prices and earnings forecasts. Consensus estimate revisions have been surprisingly modest to date; we expect to see negative revisions for 2012 in the order of 10%-15% in the U.S. and 20%-25% in Canada.

Equity levels have broken down through key support levels; we may see the market go lower before we see it go higher. Current events will ultimately lead to an excellent longer term buying opportunity, but the current environment is best suited for trading around positions to add to portfolio returns. For trading positions we encourage taking profits on market strength. For longer term investors we recommend keeping a buy list close at hand and adding to or building positions in quality names on periods of severe weakness.

Equity investors should not be fully invested and are advised to still hold some cash in their portfolios.  Despite the low returns provided through holding cash, it should still be a component in balanced portfolios. We do not recommend liquidating your entire portfolio as this may cause you to realize losses, miss out on interim market rallies and the income produced from owning securities.   Timing the market is impossible. 

Market volatility will continue, and given our outlook for an extended period of slow economic growth, whether falling into outright recession in North America or not, equities are expected to trade in a range for the next several years.  Focusing on quality dividend paying equities will reward investors over the long term.