We are almost two months into the new year, and investors are still facing the same pessimistic headlines they have grown accustomed to over the past year and a half. There were brief moments around the end of 2008 and the beginning of 2009 when investors believed they were seeing the light at the end of the tunnel, only to be brought back into a world of political bickering, negative media and lost returns. With major North American stock markets at, near, or below previous lows once again, what is an investor to do?
It is important to understand where the North American economy is today before investors make decisions about future investments. Within the last month, there have been many initiatives launched by federal governments, both here and in the United States.
In Canada, the federal government passed a new budget that will see $40 billion spent across all areas of the economy, with emphasis on infrastructure spending. In the U.S., they have officially passed a $787-billion dollar package that will plow money into areas infrastructure, health care, education and energy. Along with this stimulus package, the U.S. Federal Reserve continues to inject money in order to effectively maintain, and in some cases, lower interest rates on current mortgages to help prevent home foreclosures. This week, the Treasury Secretary will present his ideas on how the government will help banks deal with, and possibly remove, bad assets from their balance sheets. All these plans are being introduced to stem the tide of a sinking North American economy, and yet the stock market has still not reacted positively.
The last time North American markets were at these levels, the CEOs of Chrysler and General Motors were in Washington asking for money to keep their businesses going. Therefore, it should not be a surprise that we have retested the lows experienced in November — and in some cases fallen through those lows — as GM and Chrysler are back in Washington asking for more government aid. However, unlike November, I am not so sure the government will be as accommodating, thus an organized bankruptcy backed by the government may be in the cards for both automakers, a scenario that is weighing heavily on the markets.
The other factor weighing on the markets is the American government’s inability to provide specific details as to how banking assistance will be structured. There have been many calls to nationalize particularly vulnerable banks, as has been done in England and around the world. The government has floated the idea of a stress test to determine where particular banks are in terms of long term viability, however no one knows what this test, or its consequences, will look like. The government continuously rejects nationalization, but many feel that this may be the only way to correct the system – feeding a tremendous uncertainty that has many analysts guessing as to which banks the government will help and at what price to its shareholders. The unknown dealing with the bank bailouts is the largest such uncertainty, and until a plan is devised and announced the stock market will not be able to move forward.
Therefore, with these conditions dominating the stock market today, I believe investors have two main choices for their hard earned money. If they wish to be conservative and save themselves from worrying about the markets and all of their issues, they should invest their money in short term good quality bonds, GICs and high interest savings accounts. At prevailing interest rates they may not receive any growth from these investments after factoring taxes and inflation, but they may be able to preserve and maintain their capital. For those that are looking to grow their wealth over the coming years and take advantage of the current market environment, look to purchase good quality undervalued growth investments. There are many growth investments today that are still paying good dividends and are well positioned to weather these difficult times.
One of the common themes I hear when speaking to successful businesspeople is that at one time or another, they have all taken a calculated risk to get to where they are today. Investments for growth, if made correctly in this environment, may be the best calculated risk anyone can make at this time.
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.
