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Making the most of a market pullback

The third quarter reporting season in the U.S. is starting to winddown, and the majority of companies have reported better than expectedearnings on both the DOW and S&P indexes.

The third quarter reporting season in the U.S. is starting to wind down, and the majority of companies have reported better than expected earnings on both the DOW and S&P indexes. Some of these companies have even raised their guidance for future quarters to come.

So with these good results being reported, why has the U.S. stock market begun to sell off? Is this a classic case of “buy the rumour and sell the fact?” Perhaps the market has already priced in these great numbers ahead of time, pushing the market to reach its recent annual highs. If it has, some investors may be left wondering what’s next.

The United States just reported its first positive GDP numbers in more than a year -- at 3.5 per cent, growth was well above economist forecasts. Unfortunately, Canada reported a 0.1% decline in GDP for the month of August, indicating that our country is still, by definition, in a recession. Although this definition indicates the recession appears to have come to an end in the U.S., some will argue that a recession can't end without job growth. Thus, there are many differences of opinion whether both countries are still mired in recession.

In my opinion, the average investor at this time is looking to the future and may confused as to where things go from here. Even though we have seen many positives for the market as of late, individuals are looking forward and are not seeing any positive catalysts to take the market to the next level, so Investors are skeptical. All the positive earnings and good economic numbers are now in the past. Some are wondering if the GDP numbers in the U.S. are sustainable for the fourth quarter and where future growth will come from.

Investors in general -- including myself -- have been waiting for some sort of pullback in the markets since the beginning of September. It appears as though the correction is here, perhaps four to six weeks later than anticipated. In my opinion, investors should not be afraid of this correction, they should instead use it to their advantage. Many have unfortunately missed the most recent seven-month, 50 per cent rally on the North American stock markets and are waiting for any opportunity, such as a pullback, to get back into the market. This can work in our favour because at some point, when the market appears cheap again, investors will begin to buy equities and take this market to the next level. If you are an investor with cash on the sidelines today making one or two per cent, you have to use these opportunities to be a buyer of equities. There are some great companies currently yielding four, five, even more than six per cent. If you compare these returns to other asset classes like GICs or bonds, equities make the most sense for growth investors that can handle the volatility over the next six to twelve months. Thus investors should stay patient, look for opportunities and, if possible, own something that will pay a dividend so you can get paid while you wait for the growth in your investment to be realized.


If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!

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.

 
 
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