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Financial View


While this year has seen its challenges and resulting market volatility involving the events in Greece, a recession in Canada, and slowing growth in China, there is rarely a norm to the stock markets. Steady and always upward markets are the exception, not the rule.
The summer months tend to be more volatile and historically are the weakest for stock market performance. This summer was no different. Leading into the quarter was the ongoing drama surrounding Greece and its government’s ability (or lack thereof) to repay its debt. A last minute stop-gap solution helped calm the waters for the time being. Attention then turned to the realities of weaker global growth, namely China.

Here at home, Statistics Canada reported that the Canadian economy contracted in the first half of the year, meeting the definition of a recession in this country. The Bank of Canada acted in July with a cut to its key overnight rate to 0.5%. Weaker commodity prices, specifically oil, have contributed to the economic slowdown. Oil prices closed the second quarter at US$59.47 a barrel for the benchmark West Texas Intermediate (WTI). Increased supply from many producers around the world contributed to the fall in oil prices to a low of US$38.24 a barrel toward the end of August with only a modest recovery to US$45.09 a barrel. The S&P/TSX Composite Index, not immune to lower commodity prices, fell -7.9% during the quarter on a total return basis.

The recent volatility is a perfect example of why a balanced investing approach is often the best approach. While equity markets swung negative, bonds were modestly positive with a gain of 0.2% when measured by the FTSE/TMX Universe Bond Index.

Investors are drawn to the lure of equities when markets gain 10% or more in any given year. However, we’re thankful for the defensive nature of bonds during times of volatility. Investing is finding that balance of risk and reward to meet an objective. This is where bonds come in.

Globally, China’s signs of economic slowdown contributed to fears. Stocks in the United States fell -6.4% in the third quarter as measured by the S&P 500 Index (in U.S. dollar terms). When adjusted for the drop in the Canadian dollar, U.S. stocks showed a gain of 0.5% during the quarter as the Canadian dollar fell -6.9%. Global stocks, as measured by the MSCI World Index fell -8.3% (in U.S. dollar terms) and fell a more modest -1.6% in Canadian dollar terms in the third quarter. The downward volatility was widespread and indiscriminant.

To put things in perspective, equity market volatility is the norm. A correction of the magnitude we’ve experienced over the summer is well within the context of a normal market cycle. In fact, we feel confident that in the months or years to come we’ll continue to experience the occasional correction and even the odd bear market. What’s important to remember is that a balanced portfolio that includes bond funds will smooth out volatility as we strive to meet our investment goals.

Fixed income, or bonds, are the defense in a portfolio that helps smooth volatility. We rarely speak about our bond funds at parties; however, during volatile markets we’re grateful for them.
During the coming months, we’ll continue to be faced with economic issues like China, Greece, Canada, and oil. Volatility may subside, or it may increase. Last quarter, we highlighted that a correction in the context of a long-term bull market is very likely, and not necessarily a bad thing; even bulls need to take a breather.
Overall, we remain cautiously optimistic toward the market through the remainder of 2015. While the outlook remains positive, we should continue to expect gyrations in the stock market with every economic headline in the media. Keeping our eye on the longer-term and maintaining a good balance between equity funds and bond funds should serve us well.
As always, if you have any questions about the markets or your investments, I’m here to talk.

Jon D. Williams, CFP, CIM®

Senior Investment Advisor |Williams Financial Group | Manulife Securities Inc.
(519)646-1010 ext.25 | (866)977-1010 | Fax(519)646-1152