False Alarm – No Need to Panic
Wednesday, January 13, 2016
Following a tough year in 2015, markets have had a rough start to the new year. Stocks, corporate bonds and commodities are in a slump, and behaving as if the global economy is headed for a recession.
We think investors are overreacting. While the global economy has challenges, there are bright spots too. Slower economic growth is quite possible, but a global recession is unlikely. More importantly, the odds of an economic slump in the United States are especially low.
Investors are emotional, and it’s human nature to extrapolate trends and develop theories to explain whichever way the wind is blowing. Moreover, because it’s also normal to find comfort conforming to consensus opinion, it’s not surprising that investors are panicking in the face of poor market action and pessimistic media coverage.
Still, it’s important to remember that fear and greed are powerful emotions that cause people to overreact. History teaches us that investors tend to get carried away buying when markets are high and rising, and selling when securities are depressed and falling.
During the good times, it’s the most optimistic prognosticators that get all the media coverage. Remember Jeff Rubin, then CIBC’s chief economist, proclaiming in the summer of 2008 that oil would go from US$140 to US$200 per barrel? It turned out to be top-of-market talk!
Now that the momentum has changed direction, it’s the pessimists that are grabbing the headlines. In the last two days, Morgan Stanley predicted that oil could drop to US$20 a barrel; Macquarie Securities lowered its 2016 target for the Canadian dollar to US$0.59; and the Royal Bank of Scotland released a report titled “The bears have killed Goldilocks” telling clients to sell everything except high-quality bonds. It’s alarming stuff and it’s understandable why investors are concerned. Still, in time the predictions will likely prove to be as silly as $200 oil.
Reacting to the hype is rarely a good strategy. Rather, it’s best to focus on underlying economic fundamentals and stick to your long-term investment plan. If anything, now is a good time to add to equity positions rather than get trampled rushing for the exit with the crowd.
For a list of reasons to stay the course, and other portfolio strategy insights, please talk to your Odlum Brown Limited Investment Advisor or Portfolio Manager. Alternatively, you can request further information here.
It’s hard to know when the panic for the exit will end, as predicting the madness of crowd behaviour in the short term is futile. However, in the medium and long term, we are confident that economic fundamentals will override investor sentiment. There are economic headwinds and tailwinds, which make it hard to be overly pessimistic or optimistic regarding the global economic outlook. Slow, muddle-through growth remains the most likely path for the world economy. If our forecast is correct, investor alarm will prove unwarranted and stocks will recover.
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