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Amidst the constant flow of financial, economic and corporate negativity it is rather surprising that the various North American stock market indices have improved significantly over the past four weeks. In fact, since the beginning of April the TSX, Dow Jones, Russell and Nasdaq indices have all risen by over 5%. This fact is both important and astonishing for several reasons.
Firstly, with the incessant gut-wrenching corporate news of Bear Stearns, Merrill Lynch, UBS et al as well as growing recession fears, food price inflation, skyrocketing oil prices, etc. many investors have run to the sidelines and have been frozen into inactivity. This has been largely due to rising financial fears and plummeting investment confidence. Yet, in spite of all this burgeoning negativity, common stock prices appear to be oblivious and have quietly crept upward. Specific examples of this stealth rally have been the Canadian banks including CIBC and Bank of Montreal which have improved 20-30% from their financial lows of the past six weeks. At the same time, Jo-Ann Stores, an important ABC Funds holding has risen from a mid-January 2008 low of $9.03 to an April 28th close of $19.09. The question is what has changed? We believe there has been a significant change in investor psychology. In effect, rising stock prices appear to have discounted the worst of investors’ fears and have climbed the “proverbial wall of worry.” This is a positive market development.
Secondly, Ben Bernanke, the U.S. Federal Reserve as well as the worldwide central banks have done a remarkable job of restoring some semblance of credibility and stability to global financial markets. Considering the financial and corporate turmoil over the past nine months e.g. subprime mortgages, asset-backed commercial paper, Bear Stearns, Countrywide Financial, Northern Rock, UBS, etc. the present relative financial calm is astonishing. The extreme fear of the unknown is gradually dissipating and investors have begun to have the courage to look beyond the previous valley of economic despair. Now, this is not to minimize the serious global problems with regard to subprime mortgage exposure, financial institution fragility, currency instability, commodity inflation, etc., however, the relative financial calm of today is enabling investors to once again make rational, long term investment decisions.
Looking ahead we are heartened by these positive market adjustments within the context of a frenzied economic and investment environment. Although we expect worldwide equity markets to remain very volatile we believe that the recent improvement in stock prices, lower interest rates and a relatively better investment psychology portend to better financial markets over the next 6-12 months.
Thank you,
Irwin A. Michael, CFA |