Rational Advisor

What’s it going to take to stablize the markets - Well some of what we saw today, Interest rates lower. But what’s needed even more is several days of good news - That’s it. Right now, it’s bad news that’s trumping good news, eventually we will see a return to more normal, as companies announce their earnings, and you realize that most companies have nothing to do with sub-prime - what does Procter & Gamble have to do with lending to people who should not have borrowed in the first place - Nothing!

What we have seen is a healthy correction, of sanity coming back in. Now we have less likelihood of increasing interest rates, in fact, we coudl possibly see rates coming lower in US and Canada.

The drop in commodity prices also fosters for lower inflation.

What this correction has done, is taken the speculative nature out of the markets and the true investment nature in - think safety first. So what we have is a flight to safety - so, all in all, this might have been a pretty decent thing.

From a recent conference call yesterday with RBC’s chief investment strategist Dan Chournos

“We do, however, feel with almost 100% certainty that there’s unlikely to be or not going to be any further move to higher interest in the US as was a possibility as recently as six weeks ago. So, neutral to positive on the interest rate outlook, not a whole lot of disruption of the broader economy.

And so where does that leave us? It leaves us in the durable entrenched business cycle expansion, not only in North America but around the world. That, by the way, has been picking up steam in other areas of the world.

It leaves us with mild inflation, inflation that is more likely to fall into the central bankers’ conference zones within the year 18 months ahead.

With the mild and constructive interest rate climate maybe even increasing the chance of some modest rate cut as soon as the fall of this year or early in next year. It’s moved price earning ratios for the S&P for example, down at these low multiples’ similarly for other major markets around the world. The stock markets are trading at the minimum level consistent with this type of economy.

They’re actually moving towards quite attractive level in the durable economic expansion. And so opportunities will begin to pop up.

But when we look at similar periods and there were a dozen since 1950 in that we’ve looked at. And we said what happened if you bought stocks during that liquidity crisis. Well 10 out of 11 times – sorry- 9 out of 11 times, one year later stocks were higher.

And the median over the 12 months following liquidity crisis in United States is 19.3% and the only two times where your returns worth positive over the following year, 1970 when inflation took hold and 2000, but of course, that’s when a serious economy recession began.

So, I think the fixes are now gradually moving into place than - and when that does clears, we’ll see that the historical expansion will remain supportive to the stock market.

Thanks

Rational Advisor

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