Ottawa Investment Advisor John Bruce

October 2014 Client Letter

November 4, 2014

I have been telling clients for well over the last year to be braced for at least a 10% market correction, not because of serious fundamental concerns over the economy or market valuations, but rather because they happen a lot.  It’s never fun when it occurs, but it appears that the much anticipated correction has arrived.

Over the last 20 years, markets have had a 10% correction each year more than 60% of the time.  The U.S. market in particular has gone well over two years without such a correction while at the same time racking up significant appreciation since early June 2012. So, this correction seems overdue. *

That said, it is important to understand what’s driving it: is it a technical correction or a more fundamental market pullback?  At this point I believe that this is the more frequently occurring technical pullback.  In short, this is what equity markets tend to do.

Some points to ponder:

The U.S. economy remains strong in spite of the relative weakness in Europe.

  • Generally positive recent U.S. economic numbers
  • Low gas prices and improving employment should create the conditions necessary for continued consumer spending

Canada should benefit from a strengthening U.S. economy; however, the notable decline in the price of oil has adversely impacted market sentiment.

I believe that European economic weakness will correct and we will see an improving European economy over the next 12 months. Reasons for this include:

  • The European Central Bank has recently begun implementing monetary stimulus through the Targeted Longer-Term Refinancing Operations (TLTRO) and Asset-Backed Securities (ABS) purchases program that could total US$1 trillion.
  • It takes time for that stimulus to work its way through the system
  • After recent significant US$ strength, a weaker Euro should serve as a tailwind for the European economy.
  • The oft-cited  bad industrial production number for Germany in August was affected by a difficult seasonal adjustment due to an unusual number of holidays in the month
  • Preliminary data indicates that German production bounced back in September

Additionally, in the bond market, it is important to note that the drop in the 10-year treasury yield in North America over the last month was likely due to several factors:

  • Weaker, but not awful, global economic data, has helped drive the expectation of lessening demand for energy commodities
  • The drop in input commodity prices which have lowered the global inflation expectation
  • Bond yields which have moved in concert
  • The concern over the prospects of non-U.S. economies relative to the U.S. has fueled a classic flight to quality
  • Low bond yields in Europe, the German Bund in particular, continue to anchor global rates.

I will be watching the current environment very closely, but view this as a “buy the dips” opportunity.  Unfortunately for all of us, this is what “buy low” almost always feels like.

If you have any concerns regarding this market correction and wish to discuss how it is impacting your investments, please call me directly toll free at 1-866-860-4190 or 613-491-3344.

*Forbes Magazine- Article by Jim Stack, September 24, 2014


John S. Bruce

Senior Investment Advisor

This letter was taken from CI Investments.  The information in this letter is derived from various sources, including CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, Globe and Mail, National Post, Bank of Montreal Economics, and Trading Economics. Index information was provided by TD Newcrest and PC Bond. This material is provided for general information and is subject to change without notice

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (“MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

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