Take heart investors, a new peak is coming

ROB CARRICK

Globe and Mail Update

September 9, 2008 at 6:00 AM EDT

That miserable stock market of ours was smoking hot there for about a minute or so yesterday.

Having absorbed news of the U.S. government's bailout of the mortgage lending giants Freddie Mac and Fannie May, investors drove the S&P/TSX composite up about 345 points at the opening bell. Then, like a pricked balloon, the index gradually deflated before posting yet another loss.

After dropping a nasty 7 per cent in just three days last week, the Canadian market is a mess. The major U.S. stock indexes managed to hang on to significant gains yesterday, but not us. Thank God for the Danish and Finnish stock markets because last week they were the only thing standing between us and the title of top loser among the 20 global stock markets tracked on Globeinvestor.com.

Investors are unnerved by how the Canadian market has unravelled. That's clear from the tonne of reader e-mails to this column in the past week.

The big picture is that our market is faltering after a superb run of five straight winning years. But it's hard to keep this in mind when the market is falling daily and can't even grasp onto a positive news event like the bailout of Freddie and Fannie.

So, how about a pep talk? With a little perspective about what's going on today in the markets, you'll be much less likely to make any rash selling decisions and more likely to do the smart thing and selectively buy the quality stocks that are now on sale.

Let's start with what's happened to the Canadian stock market since it peaked in June. Data supplied by the investment dealer Odlum Brown show that through to the end of last week, the energy, materials and information technology sectors had fallen between 23 and 26 per cent, while the S&P/TSX composite index was off 15 per cent (including dividends). These three sectors account for about 54 per cent of the composite index, so they've been by far the biggest contributor to the current market misery.

Other parts of the market have also fallen since June, but not nearly as much as the three sectors of the apocalypse: energy, materials and information tech. Telecom stocks fell a mere 2 per cent. Financials, one of the worst-performing sectors of the past 12 months, fell a modest 5 per cent. Consumer staples, just the kind of sector you'd expect to avoid the worst of a down market, fell 5 per cent.

What comfort could there be from observing that many sectors aren't doing as badly as the overall index? Simply, that it's possible to be invested in the stock market without taking big hits like those in the headlines. Quick example: The $2.5-billion Mackenzie Ivy Canadian Fund, with just 11.5 per cent of its assets in energy, lost 3.3 per cent last week, or less than half of the S&P/TSX composite.

It's true that lots of investors have significant exposure to commodities through their direct stock holdings, through index funds and exchange-traded funds and through mutual funds that have wallowed in energy and mining stocks. For these people, the headline numbers about how badly the market is doing pretty much reflect the impact on their portfolios.

Even here, there are some positives to grasp onto. If you're near a computer, take a look at a new website created by the mutual fund company Fidelity Investments at fidelity.ca/volatility. The idea of this website is, let's be frank, to calm Fidelity customers so they don't sell the company's funds. But there's a greater good here in the form of data that show how resilient the markets can be after a major decline.

After the 1987 stock market crash, when the Canadian market fell about 22.5 per cent, it took 21 months to get back to even. After a decline of about 11 per cent that followed the 9/11 terrorist attacks, it took the Canadian market 47 days to recoup its losses.

Thinking of selling some or all of your stocks and equity funds? Fidelity's website shows how this can cause you to miss those sudden reversals that sometimes end a down period for the markets. In August, 1998, during the Russian financial crisis, the S&P/TSX composite fell more than 20 per cent. It then gained 109 per cent over the next two years.

When will the Canadian market start turning around? Maybe next year, maybe next week. Yesterday, the independent investment research firm Phases & Cycles issued a bulletin saying the pattern of trading in the S&P/TSX composite suggests: “Toronto should reach a new all-time high before the year is out.”

The current all-time high of 15,155 was reached on June 6. At some point, be it later this year or beyond, the next peak awaits.