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Why I’m optimistic in the mid-term

While these challenges are real, I believe they are fundamentally manageable and that they are outweighed by the mid- and long-term positives. I don’t believe anyone can predict market movements in the short-term and so avoid doing so myself – instead I try to focus on prospects for the economy and markets looking out eighteen months to three years.

• Some of the most extreme fears about the banking system now appear exaggerated. The stress tests of bank balance sheets gave most banks a clean bill of health and some have started repaying the funds they received earlier this year (although these stress tests also highlighted continued problems with a few large financial institutions).
• We’re going to come out of this with a more solid, better regulated financial system.
• The focus on energy self-sufficiency and clean fuels has unleashed a frenzy of entrepreneurial activity, with breakthrough technology being developed by many small and mid-size companies. In the past year, Fortune Magazine has devoted considerable space to profiling some of these companies.  Here’s a link to an article on green firms of the future:

6 Green Tech Firms of the Future

• Many of the building blocks that led to optimistic forecasts a year ago are still in place – the impact of technology on productivity and higher profits, record levels of research and development around the world, the emerging middle class in China, India and other developing countries, continued growth of trade and the global move to open markets.
• Most important for investors, the bulk of the bad news appears to be fully priced into current stock valuations. Many veteran money managers with strong track records are identifying excellent values and a number have said recently that they are able to buy good quality assets at prices well below their intrinsic value.

What I’m recommending today

While the easiest profits may be behind us, I still see good opportunities in quality stocks with attractive dividends, with strong coverage should profits decline.  The dividends on these stocks not only generate good income but also provide a buffer should markets move down.

As well, I like the value in investment grade corporate bonds and high yield bonds. While the greater volatility in these asset classes requires a stronger stomach than government bonds, the spread between the interest rates on these and government  bonds is at historically high levels, even after narrowing over the last while.

Going forward, expect continued volatility and headlines that will cause alarm. As a result, we are continuing to focus on balanced, diversified portfolios – one of the important lessons from 2008 was the critical importance of diversification. I am also monitoring any signs of significantly higher inflation or a pattern of corporate earnings coming in below expectations, either of which would cause a rethinking our portfolio strategy.

In light of what’s happened in the last year, all investors need to take a hard look at their risk tolerance and financial situation. I would be happy to sit down to update your financial plan and discuss any changes arising from this process.

In conclusion, I wanted to express my thanks for your patience through what has been an exceptionally difficult period. All of us have found ourselves challenged over the past nine months – and I expect to look back on this last while as a once in a lifetime test of our discipline and resolve.

Best wishes for a relaxing and restful summer – and remember, should you have any questions whatsoever, my team and I are here to take your calls.

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