What's happening in the Market? (part two)

Outlook for the period ahead
It is almost certain that stock markets will continue to see unusually high levels of volatility in the period ahead, and without question it will take some time for U.S. and Canadian markets and economies to work through the excesses of the recent past, whether from the U.S. housing bubble or the run-up in commodity prices.

As we look past the current environment and ahead to the mid-term, despite the ups and downs (especially the downs), there are a number of encouraging signs:

1. Central banks around the world have made it clear that they will intervene if that is what it takes to keep markets functioning-as they did this month.
   
2. The ban announced in the United States on short selling of financial institutions (a tactic used by some predatory investors to put pressure on the stock prices of those companies) is likely to reduce the extreme volatility in that sector.
   
3. To this point, it has been a financial rather than an economic crisis. While economies in Canada, the U.S. and elsewhere have slowed, there is no sign of a steep recession on the horizon. The fact that the U.S. and Canadian central banks did not cut interest rates at their recent meetings suggests that they are not predicting a significant downturn. Again, we would be happy to discuss this with you when we talk next.
   
4. A number of very positive forces are in place for the mid-term. Among these are generally low inflation, the continued positive impact of technology and innovation on productivity, the overwhelmingly beneficial effects of increasing global trade, good economic and political news from most of Eastern Europe and South America, and the inexorable momentum towards opening up markets in China, India and other parts of the developing world. Importantly, while declining oil prices have hurt stocks in the oil patch, they are helping boost consumer confidence and wallets.
   
5. Good managers are finding exceptional values today. As a result of the run-up in financial stocks, some managers with a superior track record for picking stocks largely avoided the U.S. financial sector because of overheated valuations; in some instances, these managers are taking advantage of depressed prices to start buying these stocks.

In summary
The American sportswriter Damon Runyon once wrote, "The race may not go to the swift nor the battle to the strong, but that's the way to bet."

When it comes to our investment strategy over the next while, it is, of course, possible that past lessons may not be of value going forward, and some managers who have proven their worth in the past may fail us in future. That said, when it comes to investing, building on the lessons of history and putting managers with strong track records to work for us is the best way to tilt the odds in our favour.

We look forward to discussing recent events in more detail the next time we talk. Should you have any immediate questions, we would be delighted to address them.