At times, investors can get quite impatient when they have money to invest. They want to know what to buy and they want to execute the purchase right away. However, sometimes when the market is as hot as it has been, it is a good strategy to take more time in making your investment decisions.
Even in a bull market rally, like the one I believe we are in now, there are events that take place which can cause the uptrend to pause. These types of events can be political, they can be acts of war or terrorism, or perhaps even environmental in nature. All these negative events that can temporarily derail the upward trend in the market have to be identified as either a long term market changing event or just a temporary occurrence, and thus a buying opportunity for individual investors.
Over the past week there have been a number of political events that have soured investors, causing them to take profits and become more defensive. First, it was the actions of the Chinese government, who declared their concern that their economy may overheat amid fears that economic growth in the country has grown out of control, which may trigger an inflationary problem. Thus the central government proposed new rules and hinted at others to slow their economy’s growth. Among these rules were increasing the level of reserves that Chinese banks require at all times, or even reducing the amount of loans banks make. China has been the number one driver of the world economy over the past few years, driving up commodities, mining and oil markets by their frequent and large intake. If China were to slow down, this could have a large negative effect on the broader market.
In the United States, new bank reforms have been proposed to curb and control the way they conduct business. First, President Barack Obama introduced a bank tax to try to make back lost taxpayer money due to the bailouts of major corporations and market sectors. Last Thursday, President Obama went one step further. He proposed laws which will govern how certain U.S. banks conduct aspects of their business and placed restrictions on the size of these banks as well. This did not sit well with investors, and the effect was a sell off in the equity markets in Canada and the U.S.
If these two events weren’t enough, on Friday it was announced that Federal Reserve chairman Ben Bernanke may not be confirmed for another term. Apparently, there are many politicians that are holding back their votes. Most investors and advisors around the world believe that if Bernanke is not confirmed for another term, it would cause markets around the world to fall sharply, causing more uncertainty for the broader investment community.
In assessing these political events, it is my belief that they are temporary in nature. I believe that either the new bank regulations in the U.S. will not pass as they have initially been presented, or the major U.S. banks will find a way to cope with it. I feel that even though China is trying to slow growth, which could in turn slow the growth prospects for many other countries, they are still growing at an eight to 10 per cent rate. This is still high enough to help drive the world’s economies higher. Lastly, I believe Bernanke will be confirmed for another term.
It is my opinion that investors take this recent pullback as another opportunity. You have a number of company shares that have fallen in sympathy with the broader market even though these companies are performing well. If this market pullback is just political in nature and the outstanding issues are eventually resolved, then investors need to seek out the investments today that are doing well and purchase them at these lower prices. If you are a long term growth investor, these are the opportunities that can provide for above average growth if you are an individual that can handle the risk and volatility of the equity market.
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.
