The recent unsettling market volatility has left investors understandably shaken.  Although there have been a few positive signals, the recent string of negative economic data has been driving investor sentiment decidedly more negative with increased talk of economic recession in the United States. 

Whether or not the U.S. economy falls into technical recession, it has become increasingly clear that investors are facing a prolonged period of sluggish economic growth; what was at first seen as a “soft-patch” or mid-cycle slowdown has been extended.  Despite the Fed announcing their intention to hold short term interest rates near zero percent for the next two years, corporate management lack sufficient confidence in policy makers and the economy to invest internally through hiring staff or building capacity.  But at the end of the day, cash is cash and companies have a lot of it on their balance sheets right now.  Free cash flow will either be invested at reasonable returns to generate growth, or returned to shareholders in the form of dividends and/or share buyback programs. 

The market sell-off since late July contradicts the upward trend in corporate earnings delivered during the most recent quarterly earnings reporting season in the U.S. and Canada. Canadian earnings for Q2 came in slightly ahead of consensus estimates, increasing 11% sequentially and 48% year over year.  S&P500 Index reported earnings for Q2 grew 10% sequentially and 19% year over year.  Some companies have begun to be more cautious in their guidance and future outlook, but analysts have not yet started to revise their earnings estimates lower.  Negative estimate revisions might serve as a further catalyst to take stocks lower if it is not already “priced-in”.  Is this 2008 all over again?  We believe it’s different.  Back then, plunging commodity prices and bank write-offs, coupled with massive deleveraging, made it very difficult for investors to evaluate the underlying earnings power of many companies.  Today, significant positive differences include North American banks that are better capitalized with improved financial statements and a corporate sector with healthy balance sheets.

Notwithstanding all the negativity in the market, current weakness offers investors and portfolio managers a chance to buy shares of quality companies at a significant discount.  There are several blue chip stocks that can now be bought with a dividend yield well in excess of that offered by government bonds.

For fixed income exposure, the current low rate environment offers little value in the mid to long end of the curve and we recommend investors remain short duration at this time. 

Despite the record rally in gold bullion, investors should maintain exposure to gold or at least gold equities in their portfolio as another level of portfolio diversification as gold is viewed as the currency of last resort and a hedge against inflation.

Equities had been range bound, but the recent global equity market sell-off has most indices breaking below this range. We expect volatility to continue in the near-term, yet investors should be adding to positions on weakness, particularly in higher quality, dividend-paying, defensive stocks as our intermediate and longer term bias still favours equities over all other asset classes.

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

– Warren Buffet