The Year In Review What a difference a year makes

A year ago, investors were bombarded with daily front-page news focused on dissecting the declines in the marketplace. Headlines like “Panic Grips Global Markets”, “Crisis on Wall Street” and “Markets in Free Fall” took a toll on investors and increased fear and anxiety. Sentiment and confidence spiraled down hand in glove with global capital markets that were in disarray as fallout from the global credit crisis precipitated the most severe economic downturn in over seven decades.

After reaching a cyclical low early in March, it was somewhat fitting that as we moved closer to the Vancouver Olympic Games, the markets began to recover and moved “Swifter, Higher and Stronger”.

The stock market confirmed its role as a leading indicator as confirming economic data shortly followed the upward move in equities. The stock market looked out beyond the near term and began to see that the stimulus measures were showing early signs of taking hold, the economy was not in freefall and capitalism was not in fact failing. Many positive signs for a recovery appeared over the second half of the year. Retail sales numbers are up, existing home sales are improving and interest rates remain low, all of which give consumers more confidence. As witnessed in other business cycles, early cyclicals (those sectors with the most economic sensitivity such as Information Technology, Materials and Financials sectors) gained the most with emerging evidence that the economy was on the mend.

Further support for the equity rally came with the release of second and third quarter corporate profits, which showed both marked improvements and came in well above forecast expectations.

Not surprisingly, while the moves down were in part driven by emotion, the comeback has been largely built on fundamentals.

Outlook:
Global growth is expected to gather steam in 2010 with the full impact of lower interest rates, lower oil prices and stimulus spending taking effect. Market volatility is expected to return to more normal levels as investor psychology shifts from high anxiety to a calmer mindset.
However, as economies shift from recovery to growth mode, markets will focus on emerging risks - stubbornly high unemployment, cautious and de-leveraging consumers, and inflation, as well as when and by how much interest rates will increase.

It is vital to be aware that recoveries do not occur in a straight line. An economic recovery is not an express route, and there can be a lot of stops along the way. This reinforces the importance of a sound financial plan that is diversified and balanced.

Your plan is your roadmap to success:
As 2009 demonstrated most adeptly, patience and planning remain the keys to long-term investment success, as markets began their recovery just as economic conditions seemed bleakest. For those investors who may have been sitting on the sidelines, waiting for more certainty to appear before getting back in, trying to time entry and exit points precisely is near impossible. The key to understanding short-term volatility is that it is just that, short-term. What we’ve been through, though unique in its own way, is just part of the ongoing cyclicality of the markets and the economy.

Successful investing requires a longer-term perspective, bridging back to a more normalized environment with the ability to take some volatility in stride and recognition that in the longer-term, the stock market advance never ends, but is only briefly interrupted. Equities offer the biggest potential for growth and the single most important protection against the threats of inflation and the preservation of purchasing power over time. In fact, the risks of being out of the market outweigh the risks of getting back in.
Because investors are inundated daily with information, it’s easy to get caught up in the short-term and lose sight of the fact that there is equilibrium in the equity markets. Over the longer term, investment performance tends to revert to the mean. As an example, since 1947, the average rolling 30-year return for the S&P/TSX is in excess of 10% compounded annually.

When a comprehensive financial plan is based on your own needs and goals and is well constructed, staying with that plan will help you take the ups and downs of the markets in stride.

...remember to pick up your copy of the I Love Creston magazine, available for free at most retailers in Creston!