Young and Frederick - ScotiaMcLeod Whitby

All of us have heard the old adage that equity markets are driven by fear and greed. Another phrase we have all heard and what investors seem to be asking in relation to the market is “are we there yet”. By this I mean are we at a market bottom yet? These two old sayings seem to be colliding and creating what can become a very dangerous investing environment. If you recall it was just a little over 3 months ago that the stock market established a new correction low with the TSX touching the 7479 level. At that time investors and the media were openly asking if this was the end of our financial system and was the world economic order collapsing. Banking systems globally (except Canada’s) were bankrupt, industrial giants were collapsing and firms that were centuries old disappeared. Fear griped investors globally probably pushing markets lower than they realistically should have gone. Fear of this type can do that...

Since early March though, major stock indices around the world have been rallying upwards.  Some posting advances of between 30-40%.  This rally rode on the back of a bounce in commodity prices and some economic news that was not as dark as the month before.  Investors began jumping back into equities trying to outsmart the market by getting back in before the recession was over.   This is the greed factor coming into play and raises the question “is this rally the start of a new bull market cycle or simply a bounce from a deeply oversold condition?”  

The answer to that question is the key to where do we go from here? 

We made the analogy in the first quarter to our clients that from a philosophical point of view the glass has gone from half empty to being one that is half full.  This does not mean that the water level has changed, just the conditions surrounding it have.   The economic news has improved.  Is it great?  No!  Is it news normally associated with a strong recovery of 30-40%?  Again the answer is “no”.  Have all of the economic conditions that caused us such fear just 3 months ago been resolved?  No. Are things better? Yes. 

Lower interest rates, stability in the housing market, corporate earnings at levels that were not as bad as projected, and the world has not collapsed.  Are these the conditions we would normally associate with an investment friendly environment?  No

We advocate continuing on a cautious course.  The Year of Yield and being paid to wait strategy that we at Young & Frederick Investment solutions advised in our 2009 forecast remains in place.  This is the most risk adverse path for the foreseeable future and works to protect your capital at a time when it needs protection. 

Don’t let fear or greed drive your strategy.  Rely on data, experience and your objectives and take the conservative course during uncertain times.  We will keep you apprised of when the economic danger has passed.  We will also let you know when we are there.