Market Watch

The big picture

Rate cuts exceed expectations


On Thursday, the Bank of England slashed its benchmark interest rate by an unprecedented 1.5%, bringing it down to 3%. The size of the cut jolted financial markets, which had expected at most a 75 basis point (a “bps”, or basis point, is 1/100th of one percent) reduction. The European Central Bank quickly followed by cutting its rate by half a point to 3.25%. Also on Thursday, interbank lending rates recorded their 19th consecutive daily drop, signalling a continued increase in credit market confidence.


The Canadian dollar finished October down 11.6%, its largest monthly decline ever. At roughly 85 cents, the Loonie now trades near the middle of its range—well below its high of nearly $1.10 a year ago, and well above its record low of $0.62 in Jan 2002.


Although studies have shown that stock markets fare better with Democrats in power, the S&P 500 tumbled 5.3% Wednesday following the election of Barack Obama. Market participants are undoubtedly waiting to see how an Obama administration will address the current economic environment. He will make his Washington debut as president-elect November 10 with a visit to the White House to discuss transition plans with President George W. Bush.


The markets

Yes, it really has been that bad


September and October were simply awful months for the markets. The TSX lost 14.6% in September and 16.9% in October, resulting in a year-to-date loss of 29.4% as of October 31st. Many market commentators have said this is the worst period they’ve ever seen, and they are not exaggerating. Looking at data as far back as 1940, there has never been a comparable loss on the TSX.


While we are truly in unchartered territory, history offers at least one positive hint of the future. With the exception of 2000–2001, every time the TSX has declined more than 10% in a given year, it has posted a positive return in the following year. While this is no guarantee of a positive return in 2009, down markets have almost always shown clear signs of recovery within 12 months of a crisis.

Our recommendation

Look for relative value


Equities.

It’s a stock picker’s market. Stick to your long-term investment strategy, but consider adding selected companies to your portfolio at prices reflecting value.


Fixed income.

The yields on high quality corporate bonds such as Canadian banks and insurance companies have further improved versus government bonds. Consider adding exposure.


Portfolio strategy.

Some regions and sectors have been hit harder than others. Consider reviewing your portfolio allocations to take advantage of lower relative valuations in these areas.
For more information or a copy of our in-depth ScotiaMcLeod Weekly Market Strategy report, please call me, Jeff Wareham, Wealth Advisor

(519) 660-3260 jeff_wareham@scotiamcleod.com