Is Now the Time to Invest?
Kate Warne, Ph.D., CFA
Canadian Market Strategist
| Questions | Answers |
| Will we see a pullback in the stock market? | Stocks drop frequently, but that shouldn’t prevent you from investing today. We never know when declines will happen, and usually they’re short. Stocks have dropped 5% or more about once a year in Canada and about three times a year in the U.S. Despite those frequent pullbacks, the trend tends to be higher. If you look at past one-year periods, the TSX Composite (TSX) is up 65% of the time. |
| Is the economy out of recession? | The economy is probably emerging from this recession. Real gross domestic product (GDP) rose 0.1% in June, the first monthly gain since mid-2008. In July, the Bank of Canada (BOC) announced the recession was over, and most forecasts show positive growth in the third quarter. |
| What about investing outside Canada? | Rising global stock markets and investor comfort with risks have been positive for Canadian stocks, oil prices and the Canadian dollar. They’ve all increased since March. As a result, you may need to add to your foreign investments, which may have performed less well. Most investors should have between 25%–35% of their portfolio invested outside Canada. In our view, global mutual funds with broad exposure to developed and emerging equity markets are a good choice since they have the flexibility to select investments that remain undervalued and to shift their holdings in response to changing opportunities. |
| Many are concerned that inflation will rise globally, especially in the U.S. Do you think that's a risk? | Although the headlines are occasionally filled with inflation predictions, consumer prices in most countries are rising slowly, and they’ve declined over the past year in both Canada and the U.S. The Federal Reserve (Fed) and other central banks are still worried about deflation rather than inflation, since we rarely see inflation while consumers are reducing their overall debt levels. Except for the impact of rising energy and commodity prices, that could be the situation for a while. Inflation is always a risk, especially for long-term investors, because even a return to “normal” inflation of around 3% means prices will double over 20 years. As a result, it makes sense for most investors to own rising income investments. Those are equity mutual funds and stocks that have the potential for dividend increases and thus higher income in the future. |
| What impact is H1N1 (swine flu) likely to have? | The impact of H1N1 will depend on the severity and scope of the outbreaks. So far, the fears have been exaggerated. While there are numerous cases, most have been mild and the decline in economic activity has been limited. Governments have ordered vaccines in preparation, which may reduce the overall risk. The SARS (severe acute respiratory syndrome) experience may be a useful comparison. The drop in travel and tourism due to SARS was concentrated in a few areas and lasted a short time. While it caused great difficulties for some, it did not have a large impact on the economy or markets overall. |
| Why should I own bonds with today's low yields? | Most investors should consider owning bonds and bond funds for current income and because bonds tend to behave differently from stocks in portfolios. Since medium- and long-term rates are greater than those available for shorter maturities, you may want shift any excess cash toward longer-term bonds or bond funds. If inflation remains low, the BOC may keep short-term rates low for longer than expected. |
| The TSX rebounded almost 50% between March and August. Isn't it too late to buy equities? | The stock market has historically rebounded before the economic news improved, just as we’ve seen in this downturn. But it isn’t too late to add equities as the economy emerges from recession. The TSX’s average return was 14% one year after the end of past recessions. As the global economy improves, we expect companies to continue reporting improved earnings and better outlooks, helping stocks rise. Look for companies that have historically paid dividends and have the potential to increase them. In many cases, their current yield is greater than the yield on the 10-year Treasury bond. Those stocks, and the equity mutual funds that own them, are especially attractive today. |
Contact your Edward Jones advisor today about adding investments that make sense for your portfolio.
Dividends may be increased, decreased or eliminated at any point without notice. The TSX Composite is an unmanaged index and not available for direct investing. Past performance does not guarantee future results.
