| Investing requires patience. This year more than ever. As world economies wallow through their third consecutive year of market declines, investors are starting to ask a very important question: when will it end? When will the long-awaited recovery actually happen? While it’s impossible to say for sure, there are signs that things are starting to improve. Let’s take a closer look. Stronger fundamentals . . . The story of the past few months has largely been a tale of two markets: one based on fundamentals, the other based on sentiment. On one hand, market fundamentals seem to suggest slow but steady improvement in North America. The U.S. economy is now growing slowly, thanks in large part to consumer spending. U.S. unemployment figures have also turned a corner, with job creation up over the past four months. The same goes for industrial production, which has been rising slowly for seven months.
Taken together, these figures suggest a recovery might be on the way. In Canada, the recovery is less of a possibility and more of a certainty. Corporate profits grew at an annualized rate of 50% in the first half of 2002 – signs that the business community has started to spend again. International economists are now predicting Canada will lead G7 nations with an annual growth rate of 3.5% this year, followed by 3.7% growth in 2003. That’s good news for Canadian investors. . . . but weaker sentiment
On the other hand, market sentiment remains strongly negative. In the U.S., investors took out $50-billion from mutual funds in the month of July alone. In Canada, mutual funds have suffered net redemptions for five months straight, an event that hasn’t happened since the industry started keeping track of asset flows back in 1992. Clearly, the ongoing string of earnings warnings, news of corporate misdeeds, and the continuing threat of a second Gulf War have all taken their toll on investor sentiment, and investors remain cautious about putting their money in the market. When will the bull arrive? So what does all this mean for investors?
When will the bull market finally arrive? It’s difficult to say for certain. While the fundamentals suggest a “double-dip” recession (that is, back-to-back recessionary periods) is becoming less and less likely, the strong negative sentiment from investors likely means continued volatility over the short term. One thing that is for certain, however, is that the lengthy downturn has created a number of outstanding investment bargains. There’s no denying that investing in the current market takes discipline and patience. But for those investors with a suitable long-term outlook, the downturn could be the best investment opportunity in quite some time.
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