Made in China

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Years ago I had the pleasure of being associated with two of Canada’s major news families. One sage member of one family commented on the then success of the newspaper business in Canada as this, “Pessimism sells 9 times the amount of newspapers that optimism does”. He was absolutely right and despite the fact that we perhaps buy less newsprint today, the media is still very successful following this very same formula.

Given the market selloff of Friday and the continued events of today, it is perhaps far more worthy to frame the events in the following context vs the usual plethora of explanations:

  • Our critical trading partner has been and will remain the U.S and not China. The weakness we are now seeing in markets is notS related. Employment is up, housing sales remain robust and automobile sales are solid. Even retailers remain optimistic about their results.
  • Geo-political events remain somewhat muted. Yes Greece faces a new election but they did just sign a newly negotiated bailout package that is critical for their survival. Parliament did approve this new package of loans. The Koreans are sabre rattling again but this is not new either and the ISIL conflict remains on-going.
  • In the largest market, the S&P 500, this market pullback has valuations now sitting at 15.8 times future earnings. Does this warrant any blame to contributing to the pullback? Not if we examine the 25 average which comes in at a comfortable 15.7 times! On this basis alone, one could argue then that valuations look average. Also, despite a slight decline in corporate earnings tied to issues such as a higher U.S dollar and lower oil, the earnings yield still remains attractive relative to low cash interest rates, inflation and bond rates.
  • Finally, much ado has been made in the last couple of weeks about the prospect of the Federal Reserve raising interest rates in the U.S. come September. This quick selloff and its magnitude, in my opinion may be sufficient to have them postpone such a move for yet another quarter or so.

It appears to be very clear that the roots of this market correction are tied to China. A slowdown is underway and yet they still possess enviable GDP rates relative to the rest of the world. From manufacturing, construction and domestic auto sales, you can easily spot the weak trends. Add to this their “propped up” stock market and the Yuan devaluation of two weeks ago and you have further proof.

If we all as investors, and those empowered to steward financial assets, tune out the “NOISE”! Concentrate of the facts, we will realize that our portfolios own corporations with strong balance sheets like our households, we reside/invest in nations that are on the right track. It is wise to exploit these differences in corrections to expand one’s holdings to catch the next leg up in markets.

As the old adage suggests, it’s time in the market and not timing the market that really counts.