22 Sep Summer Doldrum

While most of us have been trying to eke out a small semblance of summer from this rainier than normal year, the markets have been quietly (in Canada) retreating. Borne up by some earlier hype from the US, I believe that the highs were unsustainable, and they have backed off somewhat. You might call this the 2017 correction, and thankfully it’s relatively anti-climactic. With an economy heavily influenced by banking and energy, a slump in either of these two sectors will inevitably draw down other sectors. And that is what we’ve seen from the energy sector. I believe another factor is a less optimistic view of the United States economy. During the last US election, many promises were made that have yet to materialise. Despite that, the US market continues to roar with the DOW setting new records daily on the hopes that these changes will soon happen.

But should we be upset that our market isn’t keeping up? I don’t think so. In fact, with US stocks trading at ever higher earnings multiples, it would seem that a US correction is probable. The DOW is currently trading at 20 times earnings, but 16 is the average. That would indicate that the DOW is over-inflated by about 6-7%.  There is no avoiding that Canada and the US are closely tied together economically, but we don’t often move precisely in tandem, so I believe our pullback this summer is protection for the long term.

But it’s not all bad in the US and an understanding of what the Dow is and isn’t will put things into better perspective.

The Dow Jones Industrial average is a composite of America’s 30 largest companies. It includes such giants as Apple, Boeing, Home Depot, McDonald’s, Microsoft, Walmart, and Walt Disney. But does it really represent the state of the US economy? A more sensible index to watch is the S&P 500. As its name implies, it is made up of 500 American companies, resulting in a much better cross section of the American economy. It’s interesting to note that The Dow and the S&P 500 frequently diverge. A third popular index is called the Nasdaq and this one represents an even great number of companies, but not all are American owned. Of the approximately 3200 holdings, 400 are foreign. The more representation an index has, the better it can reflect the overall health of the economy. So while the DOW may be up due to speculation, the massive success of companies like Apple, or even a media diversion to something like a solar eclipse, other indexes are revealing a different story.

As we move into a historically low point of the year, I am taking advantage of these opportunities in a macro sort of way, to reposition, and buy into those areas that are down. It’s a good time to consolidate holdings and focus on the areas where growth is most likely. Fund managers continue to take care of the micromanagement within their fund mandates. For more information or to discuss your portfolio in detail please give me a call.