The S&P 500 has once again touched the bottom end of the trading range. For the most part this year, the index has traded in a range between 1130 and 1040. When the market gets near the top end of the range, investors are quick to take profits. They sell the rumour and ask questions later!
Now that we are near the bottom end of this trading range once again — if history is any indication of future performance — buyers should come back into the market and drive the index back up. Investors have the opportunity to get into some growth names that are trading at great valuations.
Ten-year government bond yields in the United States recently touched 2.50 per cent. This is a level investors have not seen since the worst of the recession back in March 2009. Yet the economy is nowhere near the poor state it was in, back at that time. If you recall, the global financial system was a hair away from destruction!
Today, there is no talk of financial collapse — corporations have more cash on their balance sheets than ever before and both the United States and Canada have positive GDP growth. If so much is different, why would the bond market pricing paint such a gloomy picture? In this instance, I believe the bond market is priced inappropriately, based on the current economic environment rather than the equity markets. The bond market tends to lead the way, which is why many investors have been nervous. I believe this time the equity market will prove to be correct.
Many companies once again are trading at very low levels. A company such as Manulife Financial has had its shares trading under $12 again —a level not seen since 2009. They have reported disappointing earnings to some, but it’s an overreaction for the stock to sell off as it has. Due to the most recent sell-off, Manulife is now yielding over 4 per cent as well. A great return, compared to government bonds and GICs. I’m not sure who is selling companies like Manulife Financial or other companies such as Royal Bank, which is currently yielding over 4 per cent. In my opinion, these are the times you want to be buying them!
Perhaps the buying opportunities are coming, due to the very low volume this time of year on the major indices in North America. Many investors are getting in their last-minute vacations before the kids head back to school rather than investing. Due to the low volume, shares of companies can have more price volatility than they normally would. Is this the reason for recent sell-offs? Whatever the reason, investors should look to take advantage of these opportunities and continue to buy for the future.
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Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities.