Stock market reaction is overblown – Metro US

Stock market reaction is overblown

“Sell in May and go away.” If investors took this advice, they would be a lot better off today as the market both here and in the U.S. have sold off tremendously over the last 2 weeks. The U.S. markets are down as much as 10 per cent (which, by definition is a correction) while the Toronto Stock market is off by about 6.5 per cent. Is this correction the start of a much bigger downward move going forward? When will the selling end?

I believe this recent correction on the major North American stock exchanges has been overdone. The issues in the European region are real and should not be taken lightly, however I do not believe that the turmoil in Europe should have this much of an effect on the U.S. and Canadian markets. The amount of business the United States and Canada does with Europe is not large in comparison with other regions or countries of the world. Thus, why this overblown reaction to what is happening? Our markets in my opinion are now at oversold levels and it would not be surprising for investors to come back into this market at some point soon.

Another major reason for the recent fall in the markets has to do with China and their comments about slowing down their economy. China is very concerned about its real estate market and how much prices have gone up in the last five years. The government has made it clear that it will decrease inflation by trying to slowdown the pace of growth in its country. Gross domestic product in China has slowed from about 12 per cent to approximately 9 per cent growth over the last few quarters. This has worried many analysts as China has been the main driver of growth in the world for the latter part of the last decade. If China slows and Europe has their growth rate cut due to high debt levels in the region, then this could have a major impact on global growth. This is what the markets are struggling with and why they are so volatile at this time.

It is my opinion that these fears are overblown. It is true that China may be slowing, but a 9 per cent GDP rate is still high enough for them to still require at a similar rate all the commodities and oil that they have been accumulating over the last few years. To assume they will not be requiring as much is not true. If world growth is too slow, and the Euro region (China’s largest trading partner) was to remain sluggish, it is possible that China may reconsider slowing their pace of growth for the time being.

In North America, we are seeing job growth, GDP growth, housing stability (in the U.S.) and companies reporting great first quarter earnings. These same companies are also increasing their outlook for the remainder of the year. Thus why don’t investors focus on this? Instead, the media and investors attention is on the Euro and the European region — a region that I feel should not have as profound an effect on our economy and stock markets. I would be a buyer in this market at some point. I think we will look back a year from now and see that this was just a correction on the way to higher markets.

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.