The U.S. bank stress tests -- the stumbling block that was going to put the brakes on the most recent market rally -- have come and gone with few negative effects. The global markets almost appear relieved that the results of these tests are finally behind them and they again look forward to investors moving positively ahead. Even with the background disturbance of bank stress tests, the so-called bull run in the stock market continued last week, increasing the major North American stock market’s gains to approximately 35 per cent since March 9.
The way the results of these tests were gradually leaked to the media ahead of the announcement this past Thursday helped tremendously to calm investor’s fears. The early information was accurate, naming all of the banks that would need to raise further capital and the amounts they would have to raise. All 19 banks that the U.S. regulators examined have enough money to weather the current economic conditions. At most, some banks were told that they had to raise capital as a buffer against further deterioration in the economy. Soon after the results of the tests were released, many of the largest banks that required more capital announced how they would raise the funds and claimed that it should not be a problem.
After investors -- who were bracing for much worse news -- had a chance to digest all the information overnight, they woke up Friday morning in a buying mood that lifted the stock market higher -- more than 2.5 per cent in Toronto and approximately two per cent in New York.
During the past week other important data was released that contributed to the positive mood. Housing and construction data appeared to indicate a stabilization of that sector, and unemployment numbers not only showed some stability in Canada, but also decreased by 34,000 lost jobs. While the unemployment numbers in the U.S. were not as good, they continue to rise, but at a much slower pace than previous months. With all this macroeconomic data available, investors seem willing to shrug off negativity and focus on the future, which seems to be getting a lot brighter as the year moves forward.
Many companies in different sectors of the market are starting to call bottoms to this most recent, harsh recession. Statistics from a recent survey show that many CEOs of U.S. corporations have said that they are starting to see the light at the end of the tunnel,and it is not a train as some predicted previously. Conditions overall are starting to improve.
As investors, we must always keep in mind the famous saying, “buy low, sell high.” Unfortunately, most investors do the opposite and buy after an investment has gone up. Even though the market is doing much better today and it seems like many investors may be ready to dip their toe back in the market waters, one has to consider that the market has rebounded by more than 35 per cent in a very short period of time. This means that valuations on investments that were once dirt cheap are no longer so in some cases. The risk/reward scenario on many investments is now a lot closer to even than it was when the market was at its lows. Therefore, if you are an investor that has been looking to make a purchase in this market, ideally the best time would have been a couple of months ago when the market was at a low point. However, that was also when individuals had the most concerns. Today, the concerns of the past seem to have abated somewhat and investors are willing to invest again. I am not saying that the stock market is at a high and therefore it is the wrong time for investors to be investing. What I am saying is that individuals need to be very careful, seek the advice of a professional advisor to assist them and create a strategy to take their portfolio to the next level. If an investment has already increased by too much, do not chase it. Another opportunity will come along shortly.
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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 or Metro Canada.